7 Ways to Reduce Your Taxes

The tax season is in the rear-view mirror, so now is a great time to start planning for next year’s returns. Before you put your returns away for good, spend some time reviewing your data. Review your income, deductions, and expenses to see if you can find an opportunity to make changes.

The state and local tax (SALT) limited the deduction to $10,000, a problem for most filers. This limitation especially hurt residents in California, New York and New Jersey. Texas residents also felt the pinch due to the state’s high property taxes.

Let’s look at a few ideas and strategies you can incorporate today to potentially help you lower your taxes.

  1. Increase your 401(k) contribution to maximize your deduction. The amount you can contribute this year is $19,000 if you’re under 50. If you’re older than 50, you can add another $6,000. The increased contributions will lower your taxable income and the investments will grow tax deferred.
  2. Contribute to a traditional IRA. You’re allowed to deduct 100% of your contribution if your income is below $64,000 if you’re single or $103,000 if you’re married. Your investments will grow tax deferred and you don’t have to withdraw your money until age 70 ½.
  3. If you’re self-employed, consider a SEP-IRA. The maximum amount you can contribute to your plan is $56,000. The formula for your contribution is 25% of your compensation or $56,000, whichever is less. When you retire, or you’re no longer self-employed, you can rollover your balance to an IRA.
  4. Tax-free municipal bonds are a great way to generate income and lower your taxes. Residents in California and New York must buy bonds from their home state to receive 100% tax free income. Residents in Texas or Florida can buy bonds from any state because they don’t have a state income tax. To compare a tax-free bond to a taxable one, multiply the coupon rate times 1.4. For example, if a tax-free bond pays 3%, then the taxable equivalent is 4.5%. Of course, the higher your tax bracket, the better the after-tax rate. The actual formula is (coupon divided by 1 – your tax rate).
  5. A health savings account (HSA) can give your returns a healthy boost. A family can contribute $7,000 and a single person can add $3,500. If you’re older than 55, you can add an extra $1,000 to your contribution. The tax deduction for a family is $2,700. A single filer can deduct $1,350.
  6. Charitable contributions are a great way to help others and reduce your taxes. The standard deduction increased to $24,400 for married couples ($12,200 for single households), so charitable contributions may have dropped off because people didn’t have enough itemized deductions. However, if you’re in a situation to give more than the standard deduction, then charitable contributions make sense. Donor advised funds (DAF) and other strategies can help concentrate, or bunch, your donations to make sure your contribution is more than the standard deduction. In addition, you can give away $15,000 per person, per year free of taxation for all parties.
  7. Buying growth stocks can also help lower your taxes. How so? Most growth companies don’t pay dividends. If you buy a growth company, your gain (or loss) will occur when you decide to sell. Companies like Amazon, Facebook, and Alphabet are growth companies that don’t pay dividends so you can benefit from years of growth without paying any income taxes. If you own a combination of dividend payers and non-dividend payers, then buy the dividend payers in your IRA so you don’t have to pay taxes on the current cash flow.

Taxes aren’t all that bad because they provide services that are beneficial to a free-market economy like quality roads, police protection, and safety net programs. If you’ve ever visited a third world country, you know what I’m talking about. However, you don’t have to give more money to the government than what’s legally required.

So, dust of your 2018 tax returns one last time so you can find a few opportunities to lower your taxes.

Then Jesus said to them, “Give back to Caesar what is Caesar’s and to God what is God’s.” ~ Mark 12:17

April 25, 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.

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.

Berkshire Hathaway 2017 Annual Report.

The 2017 annual report for Berkshire Hathaway is available and, as usual, it’s chock-full of wisdom.  The information written in the first few pages is priceless.  Investors of all backgrounds and ages can benefit from the words of Warren Buffett. As the world’s greatest investor, there are 85.3 billion reasons to believe Mr. Buffett knows what he’s talking about; his guidance is timeless.

Here are a few nuggets I mined from the pages of this year’s annual report.

He and his partner, Mr. Charlie Munger, don’t use leverage to enhance returns. They shun debt because they don’t want to put their current assets at risk.  If you need proof of how leverage can destroy a company look no further than Toys R. Us.  After 70 years in business this storied franchise is shutting its doors forever due to a mountain of debt.  Using margin to try and increase your returns is just as foolish.  Leverage looks good when the market is rising but it will become a nightmare during a declining one.

Mr. Buffett doesn’t “depend on the kindness of strangers” to help him grow his business.   Meaning he doesn’t rely on bankers or money lenders to fuel his growth.  Berkshire invests in Treasury Bills for safety, liquidity and opportunities.  Their T-Bills helped them during the financial crisis of 2008-2009 and it gives them a cushion to “withstand economic discontinuities, including such extremes as extended market closures.”  T-Bills aren’t sexy, and bonds are boring.  Owning boring bonds while stocks are falling is comforting.  If you’re concerned about the recent stock market volatility, add T-Bills and bonds to your portfolio.

Investors want to know what tomorrow will bring, they want a crystal ball, so they can position their portfolio accordingly.   No one knows what will happen in the future, including Mr. Buffett.  When discussing the probability of a mega-catastrophe in the U.S.  he says, “No one, of course, knows the correct probability.”  When talking about market declines he adds: “No one can tell you when these (declines) will happen. The light can at any time go from green to red without pausing at yellow.”

He views stocks as a “businesses, not as ticker symbols.”   He doesn’t buy stocks “based on their ‘chart’ patterns, the ‘target’ prices of analysts or the opinions of media pundits.”   He adds: “In America, equity investors have the wind at their back.”  He also expects to own companies “indefinitely.”

Berkshire likes to acquire entire companies with a market cap in the “$5-$20 billion range” that are easy and simple to understand with “consistent earning power.”  If a company meets the criteria set forth by Mr. Buffett and Mr. Munger they can give “a very fast answer – customarily within five minutes – as to whether we’re interested.”

During the last 53 years the share price of Berkshire Hathaway has appreciated significantly but they “have suffered four truly major dips.”  The drops in the price of the stock are listed below.  If you panicked and sold your shares during one of these drops, you would’ve missed extraordinary long-term returns from Berkshire.

March 1973 – January 1975 the price of Berkshire stock fell 59.1%.

October 2, 1987 – October 27, 1987 the stock fell 37.1%.

June 19, 1998 – March 10, 2000 it fell 48.9%.

September 19, 2008 – March 5, 2009 it fell 50.7%.

The best part of this year’s annual report is when Mr. Buffett recaps his bet with Protégé Partners.  In December of 2007, he bet Protégé that an unmanaged S&P 500 index fund would outperform five funds-of-funds.  These five funds “owned interests in more than 200 hedge funds.”  The funds-of-funds could trade their hedge funds and add “new ‘stars’ while exiting their positions in ones whose managers had lost their touch.”  The active fund managers could trade as often as they wished while the index fund was left alone, a pure buy and hold strategy.  He recommends to “stick with big, ‘easy’ decisions and eschew activity.”

The hedge fund managers in the bet were receiving “fixed fees averaging a staggering 2.5% of assets.”  As he says, “Performance comes, performance goes.  Fees never falter.”

How did this bet turnout?  Mr. Buffett’s index bet trounced Protégé Partners, their funds-of-funds and the 200 hedge funds.  In fact, one of the funds was liquidated before the ten-year bet was over.  The average annual return for the Protégé team was 2.9% while the S&P 500 index returned 8.5%!  He said the returns these “helpers” generated was “really dismal.”  All the king’s horses, and all the king’s men…

He does mention that the risks of owning stocks is higher than owning short term bonds but over time they “become progressively less risky than bonds.”  He adds, “As has been the case since 1776 – whatever its problems of the minute, the American economy was going to move forward.”

As the market swoons, Mr. Buffett likes a “depressed market” because it gives him the opportunity to buy companies at reduced prices.   When the market falls, he and his team go shopping: “So when the market plummets – as it will from time to time – neither panic nor mourn.”

The infinite wisdom of Mr. Buffett carries on and we’d be wise to follow his counsel.  Here is a recap of his guidance:

  • Avoid leverage and debt.
  • Buy bonds and T-Bills for safety, liquidity, emergencies and opportunities.
  • It’s impossible to know the future so invest your assets based on your financial goals.
  • Buy businesses and not ticker symbols. Valuation and earnings matter.
  • Focus on simple investments that are easy to understand.
  • When, not if, stocks fall use it as an opportunity to add quality companies to your investment portfolio. Buying the dips has worked well for the past few hundred years and it will probably continue to do so going forward.
  • Buy low-cost index funds and hold them forever. A buy and hold strategy is a great way to create generational wealth.
  • Fees matter, so make sure they’re low. A fee audit can help you identify the fees you’re paying.
  • Indefinitely is a long time so don’t worry about the short-term moves in the stock market. Your financial goals are more important than short-term volatility.

Last, Mr. Buffett references Rudyard Kipling’s, If, in this year’s annual report so here’s a link to the poem:

http://www.kiplingsociety.co.uk/poems_if.htm

IF you can keep your head when all about you are losing theirs… ~ Rudyard Kipling

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

4/8/18

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

 

 

 

 

 

2018 Stock Picks.

The parade of 2018 stocks picks are appearing on popular social media sites and in traditional financial magazines.  Brokerage firms, money managers and financial journalists are touting their best ideas for legions of investors. These sage stock pickers dispense names that are expected to outperform the general population of publicly traded companies.

Last year I published a list of 15,000 stocks to buy and, as a group, they did well.  The companies were owned in six different mutual funds managed by Dimensional Fund Advisors:  Core Equity I (DFEOX), US Micro Cap (DFSCX), US Small Cap (DFSTX), Real Estate (DFREX), International Core (DFIEX) and Emerging Markets (DFCEX).   The portfolio has generated a YTD return of 17.5%.  The best performing fund has been the emerging markets fund up 31.67%!

The S&P 500 is having a stellar year, up 20.13%.   It has been led by Align Technology, Boeing, and Nvidia as all three have posted gains greater than 75%.  However, not every stock in the index has done well.  About 100 companies have a negative return and half the stocks, including the 100, are underperforming the index.

Hendrik Bessembinder, finance professor at Arizona State University, published a paper Do Stocks Outperform Treasury Bills?[1]   He examined the performance of 25,782 stocks from 1926 to 2015.  The stocks produced monthly gains 42% of the time and the top 4% of stocks (1,031) accounted for the entire dollar gain in the market.  T-Bills never lost money in his study.  Despite this, stocks crushed T-Bills over the long term by a multiple of 256 to 1.  A $1 investment in T-Bills was worth $21 at the end of 2015 and $1 invested in the S&P 500 grew to $5,386.[2]

The best way to make money in the stock market is to own all the winners and avoid all the losers but this isn’t possible.  Blue chip franchises like GE, Alaska Air, Campbell Soup, Kroger’s, Walgreen’s, Harley Davidson and AutoZone are all down double digits this year.  Riot Blockchain, on the other hand, is up 870% because of its name.  Riot Blockchain was called Bioptix prior to its name change, a failed medical business.[3]  I’d be surprised if Riot Blockchain was on any list of stocks to buy in 2017.

As you research ideas for your portfolio focus on your financial plan and long-term goals.  Your plan will determine your investment selection and asset allocation.  It will also help you avoid getting get caught up in market hysteria or from being whipsawed by short-term trading moves.

Money is made by sitting, not trading.  ~ Jesse Livermore

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 18, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.  Options involve risk and are not suitable for all investors.  Photo Credit: Marie Appert, Rose Parade, 2012

[1] https://www.marketwatch.com/story/why-picking-stocks-is-only-slightly-better-than-playing-the-lottery-2017-06-28, 9/19/2017, Paul A. Merriman

[2] Dimensional Fund Advisors 2016 Matrix Book.

[3] https://www.fool.com/investing/2017/12/18/why-riot-blockchain-stock-is-soaring-on-monday.aspx, Jordan Wathen, December 18, 2017.

Do You Fly First Class?

Flying first class is an incredible experience and enhances the pleasure of travelling.  I’ve relished the warm towels, fine dining and exceptional service of first class travel.  Unfortunately, I’ve also sat in the last row sipping diet coke from a plastic cup while rationing pretzels.

Does it pay to fly first class?  Regardless of where people sit all passengers will take off and land at the same time.  A Delta One round-trip ticket from Los Angeles to New York costs $4,258 and the economy seat costs $552.  Is the experience of flying first class 7 ½ times better than economy?  It might, especially if you’re receiving value for the price you paid, and your expectations are being met.  When I fly first class my expectations are high; when I sit in economy they’re low.

Like the airline industry, mutual funds have a wide divergence in fees.  Unlike the airline industry, shareholders don’t benefit from higher fees.  Quite the opposite as high fees will lower your investment returns.  Higher fees won’t deliver a better investment experience.

Below are three funds with different fee structures listed from the highest fees to lowest.[1] The Dimensional Fund has the lowest fee and highest return.  Its fees are 90% lower than the Dreyfus fund.

Dreyfus Tax Managed Growth Fund Class C (DPTAX) has a one-year deferred sales charge of 1% and ongoing fees of 2.10%.  It has generated an average annual return of 5.74% for 10 years.

Gabelli Asset Fund Class A (GATAX) has a front-end commission of 5.75% and ongoing fees of 1.36%.  It has generated an average annual return of 7.21%.

Dimensional Fund Advisors U.S. Core Equity 1 Portfolio (DFEOX) doesn’t have a sales charges but it does have an ongoing fee of .19%.  It has generated an average annual return of 8.88% for 10 years.

How do you know if you’re paying high fees?  Here are three ideas.

  1. Fee audit. A review of your investment holdings will highlight the amount of your fees you’re paying.  Your fees can be benchmarked to industry averages.
  2. Fund Comparison. Comparing funds side by side will allow you to make better investment decisions.  In addition to the fee structure, you can compare returns, holdings, asset levels, and management tenure.
  3. Advisor Fees. If you work with a Registered Investment Advisor, the fees are listed in their Form ADV, a public document.  RIA’s are regulated under the Investment Advisors Act of 1940 and they must disclose their fees.  Brokers and insurance agents aren’t required to disclose their fees.  If you work with a broker or insurance agent, you’re going to have to work hard to uncover the fees you’re paying.  An independent advisor can help you decipher their fees.

In a few weeks you’ll receive your 2017 year-end statements giving you the opportunity to analyze the fees you paid.  January is also great time to review your financial plan and investment goals.  Are your fees hindering your plan?

2018 could be the year you upgrade to first class and start working with an independent, fee-only, fiduciary advisor!

Wise men and women are always learning, always listening for fresh insights. ~ Proverbs 18:15.

 

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 13, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.  Options involve risk and are not suitable for all investors.

 

 

[1] Morningstar Office Snapshot, ten-year return ended 11/30/2017.

Why Own Bonds?

Bonds are boring, secure and predictable.  Interest rates are at historical lows because of this high level of safety.   The 30-Year Treasury Bond is currently yielding 2.75%.  With rates this low does it make sense to own a bond for three decades?

Interest rates are low, but they’re expected to rise in 2018.  Rising rates means more income for bond holders.  However, this could be trouble because when rates rise, bond prices fall.   A 1% rise in interest rates will lower the price of the 30-Year Treasury Bond by 17.8%.

Investing is a tradeoff between short and long-term goals.   Stocks and bonds can be used together to help you achieve your financial goals.  A diversified portfolio of stocks, bonds and cash is recommended.

Stocks have outperformed bonds because of the risk associated when investing in the stock market.  This is referred to as the equity premium and economist have pegged it at 5.5% over a 30-year period.[1]   If a risk-free bond is paying 2%, then stocks should return 7.5%.

Three reasons to own bonds.

  1. If your time horizon is less than three years, owning high quality bonds is recommended.
  2. If you need to meet an obligation like a college tuition payment or the purchase of a new home.
  3. If you’re retired and need a secure income stream.

Three reasons to own stocks.

  1. If your time horizon is longer than 20 years, buy stocks. They’ve averaged a 10% return per year since 1926 and they’ve never lost money over a 20-year period.
  2. If you’re contributing to your company retirement plan, allocate a large percentage to stocks. Your money shouldn’t be touched for many years so take advantage of the long-term trend of the stock market. You’ll also purchase stock through a payroll deduction and this will help smooth out the short-term volatility of the stock market because you’re buying at different price points.
  3. If you want to create long-term wealth, stocks must be the focal point of your portfolio.

Let’s compare the performance of stocks to bonds with two Vanguard Funds – The S&P 500 Index Fund and The Total Bond Market Index Fund.   From 12/11/1986 to 11/30/2017, the S&P 500 Index Fund averaged an annual return of 9.74%.  A $100,000 investment 31 years ago is now worth $2.06 million.  A $100,000 investment in the Total Bond Market Index on the same day is worth $597,556 and it generated an average annual return of 5.94%.  The stock fund outperformed the bond fund by $1.46 million or 3.8% per year.[2]

A financial plan can assist you in deciding how much to allocate between stocks and bonds.  These two investments have different characteristics, and therefore they both belong in your portfolio.

Without good direction, people lose their way; the more wise counsel you follow, the better your chances. ~ Proverbs 11:14 (MSG)

 

 

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 11, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments aren’t guaranteed and involve risk.

 

 

 

 

 

[1] https://www.investopedia.com/terms/e/equityriskpremium.asp, website accessed 12/11/17.

[2] Morningstar Office Hypothetical Tool, 12/11/1986 to 11/30/2017.

Go Navy!

The United States Navy has protected America for more than 242 years by patrolling the earth’s oceans.   This is no small task as 70% of the world is covered in water.

At the center of this global force for good is the aircraft carrier.  It’s a powerful asset supported by a carrier strike group.   A group consists of an aircraft carrier, two guided-missile cruisers, two destroyers, one frigate, two submarines, a supply ship, and 65 to 70 aircraft.  It also includes about 7,500 personnel.[1]

The U.S.S. Ronald Reagan is one of the Navy’s largest and most sophisticated ships.  The ship’s motto is, “Peace Through Strength” and its guiding principles include professionalism, integrity, and operate as a crew.  It consists of several thousand professionals doing their job but acting as one crew to deliver excellence.[2]

The group is 100% on watch and it’s constantly looking for threats above, below and an on the water.  This efficient team works in concert to insure we can sleep peacefully.

Investors should create their own financial version of a carrier strike group.

At the center of your group should be your financial plan because it will help you formalize your financial goals and it will drive your asset allocation and investment selection.   It will also include a time-line for achieving your goals and it will assist you in charting a course for success.  When a carrier strike group leaves a port like San Diego they do so with a destination in mind, so, too, should your plan.

A team of advisors can help you achieve your goals to make sure your financial foundation is well fortified.  Your supporting cast can include a financial planner, investment advisor, attorney, accountant and insurance agent.  Part of the vision statement from the U.S.S. Ronald Reagan is “to do what is right and what is necessary, even when it is difficult.”[3]  Your advisors should apply this same metric when offering you advice and guidance.

The investment portfolio you construct should consist of high quality, low cost funds diversified across large, small and international companies with bonds and cash added to reduce risk and volatility.  Your portfolio will consist of thousands of individual securities.  A portfolio of four funds managed by Dimensional Fund Advisors (Core Equity I – DFEOX, International – DFIEX, Small Cap – DFSTX and Fixed Income – DFAPX) will own over 10,000 securities.  On any given day these individual investments may be up, down or sideways.  The daily movement of these securities are trading independently but act as one portfolio to help you achieve your goals.   An equal weighting to these four funds generated a one-year return of 17.18%.[4]

Tactical trading strategies may enhance your returns or protect your portfolio.  Adding individual stocks or stock options to your account will allow you to be nimble in the short-term.   The stock market may behave irrationally in the short term giving you an opportunity to buy or sell investments at more favorable prices.  The U.S.S. Hewitt is a destroyer and a supporting cast member to a carrier strike group.  A destroyer is used to protect the aircraft carrier because it’s fast, nimble and maneuverable.  It can be more tactical with short terms moves when compared to the massive aircraft carrier.

The supply ship is probably the unsung hero of a carrier strike group.  These ships are needed to refuel and restock the ships in the group.  Without the supply ship the group probably wouldn’t get very far.  To replenish a ship, the group must stop or slow down to receive her new supplies.   The USS Arctic is a supply ship and it can carry 177,000 barrels of oil, 2,150 tons of ammunition and 500 tons of dry goods.[5] Each year you should stop or slow down to review your investment accounts and financial goals to make sure you’re still on the right course to realizing your dreams.  A short-term pause will be beneficial to your long-term goals.

As we approach the new year I recommend spending time to create your financial strike group, so you can improve your odds of achieving financial success.  The end of the year is a great time to review your financial situation to make sure you have the right team and investments in place for your long-term goals.

Last, I want to thank my cousin, Peter Snyder – USNA ’90, for his service to our country and his help with my blog.

Anchors Aweigh!

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 7, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.  Options involve risk and are not suitable for all investors.

 

 

 

 

[1] https://science.howstuffworks.com/carrier-group2.htm, by Marshall Brain, website accessed 12/6/17.

[2] www.reagan.navy.mil, this an official website of the U.S. Navy, site accessed 12/9/2017.

[3] Ibid.

[4] Morningstar Office Hypothetical Tool, the fund symbols are DFEOX, DFIES, DFSTX, DFAPX, one year ended 11/30/20017.

[5] Msc.navy.mil and Wikipedia, sites accessed on 12/9/2017.

Rotate!

The Earth rotates around the sun.  The wheel rotates allowing us to travel with ease. Baseball, football, and basketball each rely on rotation.  Records and CDs rotate to create beautiful music.[1]

The past few trading days growth sectors like technology have sold off while beaten down sectors such as retail have rallied.   The reason given for the selloff has been rotation as investors rotate between sectors.

What does rotation mean?  It means people sell high flying stocks to buy stocks offering more value.  Investors try and bounce between winners and losers hoping to sell at the top and buy at the bottom.

Rotation also means moving money between growth and value sectors.  Growth and value stocks will zig and zag throughout a market cycle.  Growth companies typically have strong revenue and earnings growth.  They pay little, if any, dividends as they plow their earnings back into the company to fund their explosive growth.  These companies tend to trade at higher valuations based on traditional benchmarks like the price to earnings ratio.  A few companies in the growth sector include Amazon, Facebook, and Nvidia.

Value companies usually have high dividends and low valuations.   These companies are mature and have been publicly traded for decades.  Companies in the value sector include Exxon, J&J, and JP Morgan.

Should you try to trade between growth and value?  Does it make sense to try and time the market so you’re either invested in growth or value?  Trying to move money between hot and cold sectors will give your portfolio lukewarm returns.  In addition, trading between sectors may increase your tax bill and lower your total return.

In 2016 the Vanguard Value Index Fund (VIVAX) returned 16.75% and the Vanguard Growth Index Fund (VIGRX) 5.99%.  The value fund outperformed the growth fund by 10.76%!  If you were chasing returns between growth and value, you would’ve sold your growth fund to buy the value fund.[2]

In 2017 the growth fund is up 26.73% and the value fund 15.27%.  The growth fund is outperforming the value fund by 11.46%!  Selling your growth fund last year to buy the value fund wouldn’t have been wise.

The two funds have rotated between outperforming and underperforming each other for many years so trying to move money between the two is foolish.  In fact, the 15-year total return for the growth fund is 9.62% and the value fund has returned 9.61%.

A $10,000 investment in these two funds in 1992 has generated similar results.  Today the value fund is worth $100,249 and the growth fund $98,048.  The difference between the two funds for the past 25 years has been $2,201 or $88 per year.

Here are few ideas to help you with your portfolio:

  • Diversify your holdings so you can take advantage of multiple sectors because you never know which one will do well. In the chart below from Dimensional Fund Advisors it shows three different companies: A, B & C.  These companies have had different price movements over time but when they are all included in your portfolio it will smooth out the long-term returns.

DFA Chart

 

  • Don’t let short-term market moves derail your long-term goals.  The stock market is constantly moving up and down so try not to sell at the bottom or buy at the top.  A buy and hold strategy allows your portfolio to participate in the long-term trend of the stock market.
  • Rebalance your accounts on an annual basis. It will force you to sell high and buy low.  This strategy will allow you to keep your asset allocation in check and reduce your risk over-time.
  • In addition to sectors, countries also move in and out of favor. In 2015 the Denmark stock market was the best performer in the world while Canada’s was last.  A year later these two countries flipped with Canada first and Denmark last.  Adding international investments to your portfolio will help reduce your risk. The chart below from Dimensional Fund Advisors highlights the performance of global markets dating back to 1997.

DFA Country

In 2018 focus on your goals and don’t worry about trying to find the hot sector.  Diversify your accounts and pay attention to your financial plan.  The stock market is in a constant state of rotation so keep your eyes fixated on the long-term horizon.

Can you hear me, Major Tom? ~ Space Odyssey, David Bowie.

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 5, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.

[1] I’m dating myself but that’s okay.

[2] Morningstar Office Hypothetical tool for fund performance and ending valuations.

7th Inning Stretch?

The longest baseball game in Major League history occurred on April 18, 1981 between the Pawtucket Red Sox and the Rochester Red Wings with the Red Sox winning 3 to 2.   It was 33 innings long and lasted over 8 hours.  Each year about 9% of Major League Baseball games go into extra innings.[1]

Sports analogies are common on Wall Street.  A few analysts have mentioned that the market is currently in the 7th or 8th inning because of its historic rise and current valuation.  They’re speculating that the end is near.

Of course, no one knows when or how the stock market’s run will end.  The fans who attended the Red Sox v. Red Wings baseball game thought they’d see a 9-inning game not knowing it would continue for another 24 innings!  Those who stayed for the entire game endured the equivalent of 3 ½ games.

Stocks can continue to rise despite what people think about the duration of the bull market or their current valuation.  What should you do if you’re concerned about an overvalued market? Here are few suggestions.

  • Asset Allocation. The current rise in the stock market may have pushed your asset allocation beyond your risk level.  Let’s say you purchased an equal amount of the DFA Core Equity I Fund (DFEOX) and the DFA Intermediate Government Fund (DFIGX) Fund on March 1, 2009.   At the end of October your mix is now 77% stocks and 23% bonds.  This is a wide deviation from your original 50%/50% portfolio.  In this case you need to rebalance your portfolio back to your beginning asset allocation.[2]
  • Bonds. Adding bonds to your portfolio will reduce the risk in your portfolio. During the Great Recession the S&P 500 fell 53%.  A portfolio with 50% stocks and 50% bonds fell 26%.[3]   The bonds reduced the risk by about 50%.
  • International. The international markets have done well in 2017 and their current valuations are still attractive.  The capitalization of the United States stock market is about 54% of the world markets with the remainder of the global markets accounting for 46%.   Buying stocks from the U.K., China, Japan, Australia and other countries will diversify your portfolio.[4]   From 1997 to 2016 the U.S. stock market finished in the top spot only once, in 2014.
  • Alternatives. Real estate, gold, and currencies may make sense for a portion of your account.  A weighting of 3% to 5% is recommended.  Alternatives and commodities may offer account protection and an inflation hedge.
  • Cash. Cash is good short-term investment if you’re concerned about a dip in the market.  It will help cushion your account if stocks should fall.  It will also allow you to buy stocks at a lower price.  Long-term, however, cash will lose value because of taxes and inflation.

Baseball is a meandering game with no time clock.  The stock market has no time clock either and it can continue to run indefinitely.  Grab a hot dog, a bag of peanuts, and a drink and enjoy the long-term trend of the stock market.  Play ball!

But do not overlook this one fact, beloved, that with the Lord one day is as a thousand years, and a thousand years as one day. ~ 2 Peter 3:8

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

November 28, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.

 

[1] https://www.beyondtheboxscore.com/2017/8/5/16093390/extra-innings-time-how-long-how-many-average-rule-change, Devan Fink, August 5, 2017.

[2] Morningstar Office Hypothetical Tool.

[3] Riskalyze.

[4] Dimensional Funds 2017 Matrix Book.