Full Stop

Full stop. The end. Period. No more. No Mas. I’ve noticed lately that politicians, commentators, and other public figures have been using the term “full stop.” I guess they want to punctuate their point, so the viewer or reader knows they’ve stated their position, and there will be no more discussing the issue. They’re moving on to the next item.

On November 25, 1980, Roberto Duran was fighting Sugar Ray Leonard. During the fight, Mr. Duran raised his arms and said, “No Mas.” He had enough and didn’t want to finish the fight.[1] He was done – a stunner for the boxing world.

According to Webster’s Dictionary, full stop means period, and it was first used in 1643, and the origin is “chiefly British.”

The financial planning and investment management industry has their version of full stop items where no more explanation is needed. Here’s a shortlist.

  • Individuals who complete a financial plan have three times (3X) the assets of those individuals who do little or no planning.[2]
  • Stocks outperform bonds. The 92-year average annual return for common stocks has been 10%, while long-term government bonds returned 5.5%. A $1 investment in large-company stocks is now worth $7,0257, while $1 invested in bonds is worth $142.[3]
  • Small-company stocks outperform large-company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.1% from 1928 to 2018. A $1 investment is now worth $72,335. The Dimensional Large-Cap Value Index averaged 11%. A $1 investment in this large-cap index is now worth $13,442.[4]
  • Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% is attributed to market timing and investment selection.[5]
  • Passive index investing is better than active stock picking. The Standard & Poor’s study of passive v. active reveals that over a 15-year period, 95% of active fund managers fail to outperform their benchmark. The data is similar for 1, 3, 5, and 10 years.[6]
  • Lower fees are better than higher fees. Less is more.
  • Working with an investment advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[7] An advisor can help with financial planning, estate planning, investment planning, charitable planning, and much more.

Full Stop.

The grass withers, the flower fades, but the word of our God will stand forever. ~ Isaiah 40:8

October 10, 2019

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

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

 

 

 

[1] https://en.wikipedia.org/wiki/Sugar_Ray_Leonard_vs._Roberto_Dur%C3%A1n_II, Website accessed October 10, 2019

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

[3] Dimensional Funds 2019 Matrix Book.

[4] Ibid.

[5] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.

[6] https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

[7] https://www.vanguard.com/pdf/ISGQVAA.pdf

Yard Sales and Investing

Twice a year, my neighborhood holds a yard sale. It’s well advertised, so people come from all over town to hunt for trinkets and treasures. The buyers arrive with a plan and a purpose.

The people who visit our neighborhood are seasoned yard sale shoppers. Arriving in trucks with trailers, they scour our streets looking for bargains. Most were looking for clothes or small household items. I had several drive buys, but nothing the shoppers wanted. I guess they didn’t need tennis rackets or baseball mitts.

One shopper had a trailer full of used equipment like bikes and lawnmowers. The items he found needed repair, and I’m sure he’ll fix them up to resale them at a higher price. His specialty appeared to be items that were broken or needed a little TLC. One man’s trash is another man’s treasure.

In addition to being value shoppers, the buyers haggled for lower prices. If it cost $10, they’d offer $5. If the seller didn’t budge, the buyer moved on to another house. They’re patient and shrewd buyers.

Now and then, a buyer finds a rare gem. One man found an original signed copy of Ernest’s Hemingway’s The Old Man and The Sea. He purchased the book for $2, and it’s probably worth more than $30,000. A buyer in Fresno, California bought a box of photo negatives for $45 and later found out they belonged to Ansel Adams. The images are worth more than $1.8 million. An Arizona buyer found a Jackson Pollack painting worth more than $5 million.[1] It pays to hunt for a bargain.

Investors can learn much from weekend yard sale shoppers like focusing on value, being patient, and having a plan. Patient investors can take advantage of market drops to find companies in the bargain bin. When stock prices drop, most investors tend to look the other way. Not so with value investors. If a company has issues, value hunters know they’re going to get a reasonable price. Sellers, on the other hand, are liquidating because of fear. For example, Kraft Heinz, Nordstrom, Walgreen’s, 3M, Pfizer, and Schwab are all down more than 10% this year, and investors don’t appear interested in these blue chips. It’s unlikely these companies will stay down forever, so at some point value investors will swoop in and start buying.

As we approach the end of the year, look for investments that are down and out that may rebound in a year or two. If you currently own poor-performing investments, be patient.

To improve your investment results, consider a financial plan. A well-constructed financial plan will help you identify and quantify your financial goals. A Certified Financial Planner® will use your financial plan to assist you with managing your debt, taxes, investments, retirement, education, philanthropic and estate planning needs.

“I am sending you out like sheep among wolves. Therefore, be as shrewd as snakes and as innocent as doves.” ~ Matthew 10:6.

October 9, 2019

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

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

 

 

 

 

[1] https://bestlifeonline.com/garage-sale-finds/, Alex Daniel, February 22, 2019

Want More Income?

Interest rates are falling, and investors are starving for income. Coupon rates on U.S. Treasuries are paying less than 2% except for the 30-Year U.S. Treasury bond, which is paying 2.25%. Corporate bonds, CD’s, and tax-free bonds aren’t paying much more. The Federal Open Market Committee recently lowered interest rates by a quarter of a point, and they’ll probably do it again at their next meeting. With rates falling, how is it possible to generate more income?

One strategy to incorporate is a systematic withdrawal plan (SWP). This approach allows you to receive income from your mutual funds while taking advantage of the long-term growth from the stock market. Your payout will be a combination of income, dividends, capital gains, and principal. For example, if you invest $100,000 in a globally diversified portfolio of mutual funds and instruct your advisor to send you a monthly check for $400, then your payout will be 4.8% of your principal.

Your payout can be fixed or variable. With a fixed payout you’ll receive the same dollar amount regardless of your account balance. A variable payout will pay you a percentage of your account balance annually, so if your account rises, you’ll earn more income.

Let’s look at a few real-world examples.

Since 1926, a 60% stock and 40% bond portfolio has produced an average annual return of 8.92% while inflation averaged 2.89%, so the real return was 6.03%.[1]  Starting an example in 1926 is not realistic, so let’s look at three different periods: 2000, 2007, and 2009.

Each example will begin with a value of $100,000 and an annual withdrawal rate of 4% of the account balance. The mutual funds are managed by Dimensional Fund Advisors, and they’ll be rebalanced annually. The asset allocation mix is 60% stocks, 40% bonds. Here is the list of funds:[2]

  • DFA Large Cap Value (DFLVX) = 20%
  • DFA Large Cap International (DFALX) = 20%
  • DFA Small Cap (DFSTX) = 5%
  • DFA International Small Cap (DFISX) = 5%
  • DFA Real Estate (DFREX) = 5%
  • DFA Emerging Markets (DFEMX) = 5%
  • DFA Intermediate Government (DFIGX) = 20%
  • DFA Two-Year Government (DFYGX) = 20%

Example 1: January 1, 2000 to December 31, 2010. During this stretch, the S&P 500 lost 14.4%. Your original investment of $100,000 grew to $106,667, and you received $66,471 in total income. The average annual return was 6.6%.

Example 2: October 1, 2007 to August 31, 2019. From October 2007 to March 2009, the S&P 500 fell 48% during the Great Recession, so your investment timing was horrible, one of the worst times to start investing in history. As a result of your poor timing, your $100,000 sunk to $77,640, but you received $58,512 in income. Your average annual return was 3.4%. Despite the initial drop, you still made money.

Example 3. March 1, 2009 to August 31, 2019. During this stretch, the S&P 500 soared 298% or 14.05% per year. As a result of your great timing, your $100,000 is now worth $137,036, and you received $90,071 in income. Your average annual return was 10.98% per year.

Example 4. January 1, 2000 to August 31, 2019. During this time, the S&P 500 averaged 2.25% per year. Your original investment of $100,000 is now worth $99,975, and you received $121,534 in total income. Your average annual return was 6.27%.

A globally diversified portfolio of low-cost mutual funds gives you an opportunity to receive above-average income. You probably won’t start investing at a market top, or bottom, so rather than trying to time the market or trade your way to wealth, focus on your long-term goals. A diversified portfolio will allow you to capture global market returns over time, and over time, stocks win.

Invest globally, receive locally.

Here is part of the tradeoff with diversification. You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term. ~ Joel Greenblatt

September 26, 2019

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

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

 

 

 

 

[1] Dimensional Fund Advisors Returns Web, 1/1/1926 – 7/31/2019.

[2] Morningstar Office Hypothetical, gross returns before taxes and fees.

Sex, Politics, and Religion

There’s no faster way to clear a room or make people feel uncomfortable than to talk about sex, politics, or religion. These subjects are taboo to most, and they offer no middle ground. They’re polarizing topics, and in a non-politically correct world, they’re guaranteed to upset at least half of the people in your network. However, an issue more forbidden than the big three is money.

The Bible has over 2,300 verses on money-related issues, more than any other subject. God knew we were going to idolize money. He knew it would challenge us, yet we hardly discuss the topic.

Sex, politics, and religion are taught, at some level, in school. Most people probably have a working knowledge of all three subjects, not so with money. Schools have limited resources to teach kids about money, and when they graduate, their knowledge of finance is low. Credit cards, car loans, mortgages, investments, and retirement accounts are foreign and confusing concepts, especially if you have never been taught how they work.

Most of Generation Z is concerned about money as 51% of them are afraid “money issues will stop them from doing things,” and 42% of them have “unanswered questions about finances.”[1] Three-quarters of this cohort believe classes about managing finances needs to be taught in high school.[2] Despite the need, only a quarter of the students have taken any financial education classes.[3]

Financial literacy is another concern. According to the National Financial Educators Council, 54% of college students had overdrawn bank accounts, and 81% underestimated how long it would take to pay off a credit card. 70% of parents are less prepared to talk about investing than they are about having the “sex talk.” [4]

Student loan debt is another sign students and parents don’t understand money-related issues. Currently, student loan debt stands at $1.5 trillion, so it appears several of you aren’t saving enough money to pay for college or discussing the pitfalls of accumulating debt.

Do you talk about money at your dinner table? Probably not. Most of what I know about money, banking, and finance I learned on my own through reading and life experiences. Children typically follow their parents lead when it comes to managing money. I couldn’t wait to purchase a T-Bill when I was older after making several trips to First Interstate Bank with my mom and seeing the advertisements for T-Bills. My dad lost money from a Ginnie Mae investment, and for the longest time, I had an aversion to recommending them to clients. You may have a similar story on how your parents invested their money and how it formed your future investment habits.

I received my first credit card as a student in college after signing my name to a limited application. It was a Citi card with a $500 line of credit, and this was my first experience with debt. After a few charges and payments, I was “rewarded” with a more significant credit line despite not having a job. During college, my friends and I took a trip to Las Vegas, and I quickly depleted my cash, but, no fear, I had my new credit card. I made a cash withdrawal from an ATM. I wasn’t aware of the high fee for the advance and that the charge would start accumulating interest immediately.  A late-night cash advance to play blackjack in Las Vegas – what could go wrong? My debt began to climb before I decided to control my spending.

The best time to start talking about money-related issues was yesterday and the second-best time is today, so here are a few ideas to get you started.

  • Open a savings account to save $1,000. When you’ve reached your goal, then aim to save 3 to 6 months of your household expenses.
  • Create a budget to review your spending patterns and habits. Once you establish your budget, review your spending weekly, and adjust as needed.
  • Identify your debt obligations – mortgage, credit cards, auto loans, and student loans. Start by paying off your credit cards, auto loans, and student loans.
  • Limit your total debt to 38% of your total gross income.
  • It’s okay to use a credit card if you pay it off every month. If you don’t have the cash to pay it off monthly, use a debit card, and only buy what you need. If you can’t afford it, don’t buy it.
  • Automate your payments and limit your subscription services.
  • If you have children, open a 529 education account or Uniform Trust to Minors Account to start saving for college. The current annual cost for a public college is $26,000. A private college will cost you twice as much, or $52,500.[5] The current inflation rate for college costs is 6%, three times the inflation rate for other goods and services.
  • If your time horizon is three years or more, buy stocks. A lump-sum deposit works best. Employ a dollar-cost averaging strategy if you don’t have money saved up to buy stocks. Saving a few hundred dollars a month will add up over time.
  • Contribute the maximum to your 401(k) plan. The maximum amount is $19,000. If you’re 50 or older, you can add another $6,000.
  • Contribute to an IRA. You can contribute $6,000 and if you’re over 50 or older, you can add another $1,000. Your income tax bracket will determine if you can contribute to a traditional IRA or a Roth.
  • Buy a home if your time horizon is more than seven years. Buying a home will create equity, and at some point, it will be paid off. If your home is paid off in retirement, you’ll have an asset with no monthly payment. Lifelong renters will have no asset or equity, but they’ll still have a monthly rent payment.
  • Give to others by donating 10% of your income to help those groups and organizations you support. In addition to donating your resources, consider giving your time. Working with those in need will provide you with perspective.

Bring money issues into the open and don’t shy away from talking about financial matters. If you’re not comfortable tackling money topics with your family, schedule a meeting with a Certified Financial Planner™ who can help you explain the issues to others.

Money is a powerful tool; use it wisely.

And my God will meet all your needs according to the riches of his glory in Christ Jesus. ~ Philippians 4:19

September 24, 2019

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

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

 

 

[1] https://www.cnbc.com/2019/09/10/your-kids-dont-think-your-money-skills-measure-up.html, Sarah O’Brien, 9/10/19

[2] Ibid

[3] Ibid

[4] https://www.financialeducatorscouncil.org/financial-literacy-statistics/, website accessed 9/15/19

[5] Money Guide Pro

Certainty

We want certainty in an uncertain world. We want to know the weather report, and what’s for dinner, and where we’ll spend our vacation, and how our stocks will perform. If given a guaranteed chance of receiving $100 or a 50% chance of receiving $200, most of us will opt for the certain payout of $100.[1]

This past Saturday Saudi Arabia’s Abqaiq oil processing facility was attacked. The world’s largest oil field can produce close to 10 million barrels of oil per day, and this attack could knock out 50% of the kingdom’s production.[2] Because of the attack, West Texas intermediate crude oil spiked 14%.[3] How do you plan for a strategic strike on the world’s largest oil exporter? You can’t.

In 2016 Dennis Gartman said oil would not trade above $44 “in my lifetime.”[4] Crude oil closed at $61.56 on Monday. He was certain in his prediction.

Last year, Jamie Dimon, the CEO of JP Morgan Chase & Co, predicted the 10-year U.S. Treasury would hit 5%. It currently yields 1.79%.[5] He’s now preparing for 0% interest rates. Mr. Dimon has his pulse on the economy as the CEO of the world’s second-largest bank, and if he can’t predict the direction of interest rates, let alone the level, who can?

I feel sorry for analyst and experts who are forced to give price targets or predictions because it’s an impossible task. However, investors and the media want answers. If an analyst provides a price target, they must know something we don’t. But they don’t. It’s an educated guess. It gives us a false sense of security because we want the assurance that somebody somewhere knows something.

I worked for Morgan Stanley for several years, and after Dean Witter merged with Morgan Stanley, I was talking to an analyst about stock research reports. He said institutional clients focus on the depth of the research while retail investors look to the price target. Retail investors are looking for certainty.

Certainty is safety. If you bought a U.S. T-Bill and held it to maturity, you would never lose money because they offer a guaranteed return. T-Bills have generated an average annual return of 2.3% for the past 15 years while inflation averaged 2%. Stock market returns are uncertain and not guaranteed. The S&P 500 has returned 6.8% annually for the past 15 years, despite a 56% drop during the Great Recession. Certainty and lower returns are linked.

How can you plan for certainty in an uncertain world? Here are a few suggestions.

  • Financial Plan. Your plan will account for uncertainty, chaos, and disorder. The Monte Carlo simulation outlines several outcomes – some good, some bad. Money Guide Pro financial planning software will run 1,000 different scenarios to provide you with a range of possible results. John Maynard Keynes said, “I would rather be vaguely right than precisely wrong.” A Monte Carlo analysis will give ranges that will be vaguely right.
  • Short-term bonds will give you predictability and liquidity. When the world erupts in bedlam, short-term bonds provide a high degree of safety. Bonds and stocks are inversely correlated, so when one rises, the other falls.
  • A cash reserve will give you access to your money without having to sell your stocks when they are down and out. Cash levels vary depending on your situation. A recommended amount is three to six months’ worth of your household expenses. If you’re about to retire, I suggest holding three years’ worth of cash in a money market fund or investing in short-term bonds.
  • A globally balanced portfolio will give you exposure to thousands of securities scattered around the world.
  • Embrace uncertainty. Chaos and disruption allow you to purchase stocks and other risk assets at deep discounts. Buy low and sell high. When others are panic selling, you can buy great companies that should eventually rebound.

The only certainty is uncertainty.

“What you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.” ~ Danny Kahneman, Nobel Laurette – Economic Sciences (2002)

September 18, 2019

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

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

 

 

 

 

 

 

 

[1] https://www.gsb.stanford.edu/insights/why-uncertainty-makes-us-less-likely-take-risks, by Dylan Walsh, June 1, 2017

[2] https://www.cnbc.com/2019/09/16/aramco-saudi-arabia-attacks-on-oil-supply-wipes-out-spare-capacity.html, by Huileng Tan, 9/15/2019

[3] https://www.cnbc.com/2019/09/15/dow-set-to-fall-on-fears-spiking-oil-will-slow-the-global-economy.html, By Fred Imbert, 9/15/2019

[4] https://finance.yahoo.com/news/dennis-gartman-best-contrarian-indicator-165610794.html, By Wayne Duggan, June 8, 2016

[5] https://www.marketwatch.com/story/jamie-dimon-warns-of-5-treasury-yields-but-sees-stock-run-lasting-a-few-more-years-2018-08-06, by Rachel Koning Beals

A Weekly Budget

While playing football, my coaches corrected my behavior If I made a mistake. They’d stop me in my tracks to point out what I did wrong. The feedback was instantaneous. If they had waited months or years to highlight my error, it wouldn’t have been useful. Because of their enthusiastic shouting, I usually didn’t make the same mistake twice. Correcting behavior needs to be consistent and immediate.

You may need help in correcting a bad habit, like poor budgeting. If you’re like most people, you might check your balance once or twice per year – if at all. As a result, you probably don’t have a good idea of how you’re spending your money.

To improve your cash flow and spending patterns, consider reviewing your budget weekly. This small change in behavior will help you identify spending issues sooner rather than later. It will allow you to make changes to your spending patterns.

To simplify your budgeting process, consider automating it with an app like Every Dollar from Dave Ramsey: https://www.daveramsey.com/everydollar. Another great resource is Mint from Intuit: https://www.mint.com/. These apps will make it easier for you to reign in your finances. And, if it’s easy, you’re more likely to stay with it.

Consumers must get a handle on their spending because debt is spiraling out of control. Mortgage debt is $9.4 trillion, student loan debt is $1.5 trillion, and auto debt is $1.3 trillion.[1] Unfortunately, our government is not good at budgeting either. The budget deficit recently surpassed $1 trillion, and our national debt is north of $22 trillion.

How much debt is appropriate? Your total debt should be less than 38% of your total monthly gross income. If your gross income is $10,000, then your debt should be less than $3,800.

What about spending? According to the Bureau of Labor Statistics[2], here’s how much people are spending on certain items as a percentage of their gross income. How do you compare?

Food = 12.9%

Housing = 32.9%

Transportation = 16%

Healthcare = 8.1%

Utilities = 6.5%

Entertainment = 5.6%

Cell Phones = 1.9%

Pets = 1.1%

Are you ready to start working on your weekly budget review? Here are a few steps to help you get started.

  • Gather your bank and credit card statements from the past six months.
  • Input the data to Excel to Identify amounts and patterns. Most financial institutions will allow you to import the data directly to Excel, saving you a few hours of number crunching.
  • Automate your bill-paying to avoid late payment fees.
  • If you’re no longer using a service, turn off the automatic payment.
  • Download an app to track your spending.
  • Review your budget weekly.
  • Eliminate or reduce unnecessary expenses.
  • Use the extra savings to reduce your debt.
  • If your debt level is low, then set up an automatic investment plan.

A Certified Financial Planner™ can help you with your budgeting and planning needs. They’ll review your spending to help you develop a budget. They can also meet with you quarterly to evaluate your progress and hold you accountable, like a coach – without yelling!

A budget will bring you financial peace, and you can spend your money without guilt or worry.

For where your treasure is, there your heart will be also. ~ Matthew 6:21

September 14, 2019

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

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

 

 

 

 

 

 

 

[1] YCharts

[2] https://www.bls.gov/home.htm

Construction Project

My neighborhood is in the middle of an enormous construction project. It’s chaos. Dump trucks and bulldozers are moving massive amounts of dirt to expand our roads and intersections to handle more traffic. A new retail shopping center and access road are also under construction. Commuters are challenged with lane closures, lane shifts, and traffic jams.

Our neighborhood is cluttered with barricades and orange pylons. It doesn’t look good. It may be this way for another year or two, but when it’s finished, it will look amazing.

Projects of this size require years of planning, vision, persistence, and grit. Developing a financial plan and building an investment portfolio also requires imagination and perseverance.  Initially, your plan is a dream, and it will only take shape after you commit your goals to paper. The foundation for a successful investment experience is a financial plan. Your plan is your blueprint. Can you imagine construction workers working without a plan? I can’t.

A plan can take years, sometimes decades, to see it come to fruition. It’s challenging to plan for a retirement that’s more than 45 years away. Likewise, retirees might find it hard to rely on investments to generate a steady stream of lifetime income.

The construction projects succeed because electricians, plumbers, and masons have different specialties. Similarly, a successful investment portfolio requires investments scattered around the globe. Large, small, and international stocks deliver long-term growth. Bonds provide income and safety. Cash offers liquidity.

A general contractor coordinates and oversees the project and workers to keep it moving forward. A Certified Financial Planner® is your general contractor. He guides your steps to keep you focused on your goals and make appropriate adjustments.

Regular maintenance on buildings, lights, and sprinklers will keep the area looking good and functioning correctly for generations.  Your portfolio will also need regular maintenance to weather market and economic cycles. Rebalancing your portfolio will keep your asset allocation and risk tolerance in check. Your financial plan needs reviewing annually to keep you focused on your goals. A monthly savings program should help your account grow.

A good plan doesn’t matter if you don’t implement it and follow the instructions. It’s imperative to put your plan into action so you can enjoy the fruits of your labor.

“Plans are worthless. Planning is essential.” ~ Dwight D. Eisenhower 

September 9, 2019

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

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

 

 

 

 

How to Survive A Recession

Hurricane Harvey blasted Texas and left a trail of debris in its wake. The refineries couldn’t produce gasoline, and, as a result, Texans faced a gas crisis. As pumps ran dry, people panicked and emptied grocery stores and ATM’s. It was a few days of bedlam.

Barron’s Magazine this week ran several stories about preparing for the worst. One article had the ominous headline: “9 Meals Away from Disaster.” In the article, it quoted British MI5 as saying: “At any given time, we’re nine meals away from anarchy.”[1] Nine meals equate to three days’ worth of food. If Texans panicked over a lack of gas, can you imagine the reaction people would have if they couldn’t feed their families?

Since the Dow Jones peaked July 23rd, it has fallen 6.25% as investors react to recession fears. The Twitter Trade war escalated this past Friday, sending the Dow down by 623 points, or 2.4%. Also, interest rates are inverting, a semi-valuable predictor of recessions. Currently, the 1-month Treasury rate is 2.07% while the yield on the 30-year is 2.02%. You earn more interest in 30 days than you do for 30 years.

What exactly is a recession? Here’s a definition from Investopedia: “A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It is typically recognized after two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators like employment. Recessions are officially declared in the U.S. by a committee of experts at the National Bureau of Economic Research (NBER), who determines the peak and subsequent trough of the business cycle which demonstrates the recession.”[2]

A recession is identified by a “committee of experts” after they determine the “peak” and “trough” of the business cycle. In other words, we won’t know we’re in a recession until it’s almost over.

If GDP (Gross Domestic Product) is the barometer, how’s it doing? Currently, real GDP growth is 2.1%. Since 1947 it has averaged 3.2%.[3] During the Great Recession (2007 – 2009) GDP growth bottomed in the fourth quarter of 2008 when it fell 8.4%. In 1954 GDP growth fell 10%.

Since March 1989, GDP has averaged 2.5%. During the past three decades, we’ve had 110 quarters with positive growth and 12 negative ones. We’ve had three recessions: 1989, 2001 and 2008, or about once in every ten years. Below is a chart of the GDP growth with a recession overlay.

IUSRGDPG_chart

How did the market perform over the past 30 years? Since August 1989 it has risen 966.7%. The Dow Jones closed at 2,402.68 on August 24, 1989. It closed at 25,628.90 yesterday. During the Great Recession, the market started to rebound in March 2009, six months before GDP growth turned positive and the recession was declared over.

What should you do if we’re on the edge of another recession? Here are a few suggestions.

  • Buy Gold. From 2007 to 2010 gold (GLD) appreciated 120%. Since 2011 it’s down 5.15%. The precious metal performs well during times of fear, chaos, and duress.
  • Buy Bonds. Long-term bonds soared 28% in 2008. During the Great Recession, they were up 6.4%.
  • Buy Small Caps (Maybe). During the last recession, small-cap stocks rose 3.84%, primarily due to their lack of financial leverage.
  • Raise Cash. Money market funds, savings accounts, or T-Bills will allow you to pay your bills and preserve your assets. How much? According to Mark Zandi, Chief Economist at Moody’s Analytics, recessions last about ten months.[4] So, if you’re concerned about a prolonged recession, then keep two to three years’ worth of household expenses in cash or short-term investments.
  • Store Cash. Keep a few thousand dollars in your household safe in the unlikely event you can’t access your bank or ATM.
  • Buy Stocks. The best time to buy stocks is when everybody else is selling. Wealth creation starts during bear markets. When fear is high, values are low. It takes courage to buy when others are selling. Sir John Templeton bought 100 shares of every stock on the New York Stock Exchange trading below $1 during the Great Depression. His two investment themes were “avoid the herd” and “buy when there’s blood in the streets.” He died in 2008 with a net worth of $13 billion.[5]
  • Doing nothing is a prudent strategy. A balanced portfolio of large, small, and international stocks and bonds produced an average annual return of 7.42% from January 2007 to July 2019. Investing monthly, through the recession, improved your performance to 8.4% per year. If you bought the portfolio on January 1, 2007, and sold on December 31, 2010, you would have made 3.13% – not significant, but positive.[6]  A buy and hold investor survived the Great Recession by doing nothing.
  • Reduce Debt. The last ten years have treated investors well, and you may have substantial capital gains. If so, take your profits and pay off your debt. Reducing your debt level will allow you to survive a recession if your cash flow drops.
  • A recession impacts human capital. If you’re fortunate enough to have financial assets, use them to help others during a time of crisis. Your gift may allow another family to recover from the pit of despair.

Recessions are frightening to be sure. However, no one can predict when, where, or how they’ll arrive. It’s impossible to forecast what factor will take down our economy, and no two recessions are alike. You will die a thousand deaths worrying about an economic collapse, especially if you’re watching the evening news or reading social media sites.

Jesus said it best in Matthew 6:25-34: “Therefore I tell you, do not worry about your life, what you will eat or drink; or about your body, what you will wear. Is not life more than food, and the body more than clothes? Look at the birds of the air; they do not sow or reap or store away in barns, and yet your heavenly Father feeds them. Are you not much more valuable than they? Can any one of you by worrying add a single hour to your life? “And why do you worry about clothes? See how the flowers of the field grow. They do not labor or spin. Yet I tell you that not even Solomon in all his splendor was dressed like one of these. If that is how God clothes the grass of the field, which is here today and tomorrow is thrown into the fire, will he not much more clothe you—you of little faith? So do not worry, saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ For the pagans run after all these things, and your heavenly Father knows that you need them. But seek first his kingdom and his righteousness, and all these things will be given to you as well. Therefore, do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own. 

I been to the edge, an’ there I stood an’ looked down. ~ Van Halen, Ain’t Talkin’ ‘Bout Love

August 24, 2019

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

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

 

 

 

 

 

[1] 9 Meals Away from Disaster. Financial Advisors on How to Prepare for the Worst. Mike Zimmerman, August 23, 2019

[2] Investopedia, Recession definition, reviewed by Jim Chappelow, Updated May 6, 2019

[3] YCharts US Real GDP Growth

[4] https://www.usatoday.com/story/money/2019/08/19/recession-what-does-mean-and-what-like/2030642001/, Janna Herron, August 19, 2019

[5] https://en.wikipedia.org/wiki/John_Templeton, website accessed August 24, 2019

[6] Morningstar Hypothetical. Equal weighted portfolio rebalanced annually: IVV, EFA, IJR, TLT.

Working Forever

I’m going to work forever, never retire. I love my job, I like my clients, my commute is less than four minutes, and my office is air-conditioned with high-speed internet. What could be better? When I tell people I’m going to work forever, they think I’m crazy. Likewise, when I meet someone who’s going to retire early, I think they’re crazy. There’s probably a happy medium in there somewhere.

My movement is going to be called FINR (Finer): Financial Independent Never Retire, the opposite of the FIRE movement, Financially Independent Retire Early. Individuals who adhere to the FIRE movement save an excessive amount of their income so they can retire early.

Of course, if you’ve saved up enough money to retire early, go for it. If you want to work forever, knock yourself out. It’s your money. Someone once told me: “It’s my money; I can do whatever the hell I want with it.” If you have enough resources to cover your expenses for the rest of your life, then you can do whatever you want.

Several high-profile people are still working, or they never retired. Warren Buffett is 88 and his partner, Charlie Munger, is 95. Mother Teresa worked until the end. I’ve searched the Bible for the word retirement, and it doesn’t exist.

What are some advantages to working forever? Here are a few:

  • Live Longer. According to a Harvard Medical School study, they found that individuals who work longer also live longer and are in better health than those who retire early. They site physical activity, mental stimulation, and social engagements as key reasons.[1]
  • Delayed Social Security. Working longer will allow you to defer your Social Security benefits to age 70. You’re eligible to receive your benefits at age 62. For every year you defer your benefit, you’ll get an 8% raise. For example, at age 62, you may receive $21,475 per year, but if you wait until age 70, you’ll get $39,750.
  • No RMD’s. Working past age 70 will allow you to defer your required minimum distributions for the money in your 401(k). You’re still must take your RMD from your IRA if you work beyond age 70, however.
  • Save less. The longer you plan to work, the less money you need to save monthly. If your goal is to save $1 million in 10 years, you need to save $6,440 per month. Expanding your time horizon to 50 years means you only need to save $375 per month. Of course, you’ll never know when, where, or why you’ll need money, so save as much as possible today.
  • Give more. Working longer will allow you to give more money away through employee and employer contributions without dipping into your principal or savings.
  • Healthcare benefits. One obstacle to early retirement is paying for healthcare. Retiring before age 65 will force you to purchase private healthcare insurance — an expensive expense. Working beyond age 65 will allow you to use your employer’s health benefits.

Working longer doesn’t mean you have to forego living. I’ve seen most states and visited several countries. My family and I take vacations every year, and we enjoy hobbies. I still hike, bike, fish, run, read, and so on. Working hasn’t hindered our ability to enjoy life.

The end is inevitable Maverick; your kind is heading towards extension. Maybe so, sir, but not today. ~ Top Gun Maverick 2020 Movie Trailer.

July 20, 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. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

[1] https://www.health.harvard.edu/staying-healthy/working-later-in-life-can-pay-off-in-more-than-just-income, Published June 2018, website accessed July 20, 2019.

All Time Highs!

A record number of climbers reached the peak of Everest this year. In fact, it was so crowded that climbers had to wait in a long line to reach the summit and the approach to the peak was described as a “traffic jam.”[1] A climber spends about two months getting acclimated to the elevation before they start their ascent to the highest point on earth.[2] After a few minutes at the top snapping a few selfies to capture the view they’ll start descending to base camp. A slow climb to the top, a faster descent home.

This past week the S&P 500 hit an all-time high of 3,013. It’s been a long, slow ascent for the index to reach its current peak. In 1998 it crossed 1,000 for the first time. It broke through 2,000 in 2014. Fifty years ago, it was at 92. When I started in the business it was 330 and the Dow Jones was trading below 3,000!

The rise from 92 to 3,000 hasn’t been straight up, of course. During the Great Depression the index produced a return of .6% per year (1929 – 1943). In the decade of the ‘70s it rose 15 points, or 1.5% per year. It fell 42% from August 2000 to September 2002. It cratered 46% from October 2007 to March 2009. Despite these rough patches, the index managed to generate an average annual return of 10% dating back to 1926.

What now? Will the S&P 500 fall back to earth? Will it dip or dive soon? Who knows? I’m sure it will be as volatile as it has been in the past. When it does drop, use it as an opportunity to buy a few quality stocks or funds. Buy the dip, historically, has been good advice.

If you’re concerned about a descent from the ascent, here are a few strategies you can incorporate today to protect your assets.

  • Take some gains and sell your stocks. Locking in a profit never hurts. You can sell your winners or losers to raise cash. Ideally, you’ll want to sell your winners in a tax deferred account like an IRA and sell your losers in a taxable account for the tax write off. Regardless, selling stocks to raise cash makes sense if you’re concerned about a drop.
  • Buy bonds. Buying bonds yielding 1% to 2% sounds boring. It is. Bonds reduce risk and volatility in your account. During times of duress, however, you’ll be glad you own bonds. In the drops I mentioned above, bonds performed well. During the Great Depression, long-term government bonds averaged an annual return of 4.3% (1929 – 1943). During the ‘70’s they averaged 5.5%. In 2000 bonds rose 21.5% and they climbed 25.9% in 2008.
  • Buy puts. Use put options to hedge your portfolio for short term moves. Options are used to protect individual positions like Amazon or indices like the S&P 500. This strategy is expensive, so use it sparingly. Let’s look at a put option for Amazon. Amazon is currently trading at $2,012. Buying the August 16, 2019 $2,010 put option will cost $6,155 for every 100 shares you own. If Amazon falls below $2,010 on, or before, August 16 you may profit on your trade. If Amazon stays above $2,010, you’ll lose 100% of your investment. If a short-term option strategy is too risky, you can extend the maturity date. For example, the January 17, 2020 $2,010 put option will cost $13,410. Still expensive and risky. To employ this strategy only work with an advisor who is well versed in trading options.
  • Do nothing. Be still and let your stocks run. Trying to time the market may cost you more than a market correction. Over time, a buy and hold strategy performs well. A recent study by Dimensional Fund Advisors highlights this point. From 1926 to 2018, they found the market is significantly higher after a market reaches a new high. According to their study, the market is 14.1% higher one-year after reaching a new high. The three-year average is 10.4% and the five-year average is 9.9%.[3] Don’t sell your stocks If your only reason to sell is because the market has reached a new high.

Everest will always be there and so will the stock market. Unlike Everest, the S&P 500 can continue to soar to new heights – without limit. I’m not sure what the market will do in the next few months, but I’m convinced it will be significantly higher 50 years from now. My recommendation is to stay the course and enjoy the view.

I lift up my eyes to the mountains – where does my help come from? ~ Psalm 121:1

July 13, 2019

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

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

 

 

 

[1] https://www.washingtonpost.com/world/2019/05/24/mount-everest-has-gotten-so-crowded-that-climbers-are-perishing-traffic-jams/?utm_term=.6d6dd10799e9, May 25, 2019 by Siobhan O’Grady

[2] https://www.nepalsanctuarytreks.com/how-long-does-it-take-to-climb-mount-everest/

[3] file:///C:/Users/parro/Downloads/Timing%20Isn%E2%80%99t%20Everything.pdf, July 2019