Ready To Launch

My daughter starts her job in a few weeks, and we are helping her set up her apartment. After years of schooling, she is ready to begin her career, and assisting a child in launching her career takes years of planning and patience. It’s bittersweet because she is leaving the nest to create a new life in a new state, but she is ready to soar.

As a parent, I give my daughter unsolicited financial advice regularly, and sometimes she welcomes it, so here are a few more tidbits for her as she begins a new chapter.

  • Create an emergency fund because unexpected expenses occur often. As your income rolls in, allocate a few dollars monthly to a savings account or money market fund so you can access it quickly. Do not invest your emergency fund in stocks, bonds, or cryptocurrency.
  • Contribute at least ten percent of income to your 401(k) plan. If your company offers a Roth option, choose it because your money can grow tax-free for decades. Initially, allocate 100% of your funds to stocks, and do not buy bonds.
  • Donate ten percent of your income to groups, charities, or organizations you support. Cheerful givers are also successful investors.
  • Open a brokerage account to buy stocks. Investing in a taxable account gives you flexibility if you want to retire early, buy a house, or travel the world.  
  • Buy and hold stocks. Don’t worry if the stock market rises or falls because it will do so regularly, and the market will experience corrections of 20% or more every few years. The odds of a 50% stock market crash during your working career is 100%. Down days in the market are opportunities to buy great stocks at lower prices. Don’t fear corrections.
  • Avoid buying gold, silver, or other commodities. It’s okay to buy gold or silver coins as collectibles but not as investments. Historically, commodity investments perform poorly relative to stocks.
  • Buy insurance to protect your car, home, valuables, and loved ones. Do not buy life insurance as an investment, and avoid whole-life insurance.
  • Avoid credit card debt at all costs. Debt is a four-letter word; if it grows, it can lead to delayed gratification or financial ruin.
  • Spend freely. If you’re contributing to an emergency fund, a 401(k) plan, and an investment account, then it’s okay to spend the rest of your paycheck on anything you want without guilt.

I’ve seen thousands of financial plans and investment accounts during my career, and the most successful investors I’ve met own stocks, start investing early, save money, and control spending. Individuals who fail to save or invest in their twenties or thirties struggle to make ends meet later in life.

Let’s run a few numbers as to why it’s essential to start investing sooner rather than later if your goal is to retire with a million dollars at age sixty-five.[1]

  • At age 25, you need to save $380 per month.
  • At age 35, you need to save $820 per month.
  • At age 45, you need to save $1,920 per month.
  • At age 55, you need to save $5,777 per month.

If you start investing early, your money can grow through the power of compounding and time. If you started your career forty years ago, in 1982, you enjoyed close to 10% returns as the S&P 500 rose 3,888%; for every $10,000 you invested, it’s now worth $398,000!

Investing takes time and patience. If you start early and save often, the stock market can grow your wealth, even if you make a few bad investments along the way.

Good luck, Little Bird!

You can be young without money, but you can’t be old without it. ~ Tennessee Williams.

August 9, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so you 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. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. My first investment was the Franklin Utility Fund when I was 24.


[1] I used a 7% annual return, and I know $1 million dollars in forty years will not be sufficient to retire.

Rivers

Where’s the river going, dad?

To the ocean.

Straight to the ocean?

No. It will twist and turn for thousands of miles.

Where did it start?

Up there, atop the mountain. It starts with a raindrop, fills the lake, creates a waterfall, and makes a river.

A raindrop is so tiny. How can it make a river?

One raindrop is tiny, but billions are powerful, a force of nature that creates a raging river or a tranquil pond.

How long will it take to reach the ocean?

Months, many months.

Months?

Yes. It’s in no hurry to get where it’s going. It will meander through mountains and valleys and enjoy the journey.

What does meander mean?

Hmm. Meander. Yes. It means to stroll or walk. It will take its sweet time – faster in parts, slower in others.

Why doesn’t it go fast all the time?

It goes as fast as it needs to go. If it’s flat, it goes slower; if it is flowing from a mountain or rolling down a hill, it will go faster. It has a job to do as it travels across the country.

A job?

A job.

What do you mean?

The river is a resource for many, and it’s filled with life, like fish and plants.

Like the fish we catch.

Yes, ma’am. Big, beautiful trout.

What else does it do?

It feeds the trees and plants. It provides water to farmers so they can grow the food we eat.

What else?

It lets animals and birds drink from its banks.

Like my horse?

Yes. When Sage is thirsty, she’ll bow down to the river and lap up water to quench her thirst.

What else?

It provides power to the electric company so we can turn on our lights.

Power?

A raging river produces power, and if you can harness it, it will provide energy to millions.

What else?

Big boats float on their back, moving cargo from one town to another.

What kind of cargo?

All kinds. Grains, cars, cattle, you name it.

Toys?

Ha! Yes, especially toys.

What else?

Well, others use it for fun.

What kind of fun?

Oh, boating, for example, or fishing, or swimming.

Is this the biggest river in the world?

No, there are larger ones like the Mighty Mississippi, the Nile, and the Yangtze.

Is it the fastest?

No, others are faster, I’m sure.

Is it the slowest?

I doubt it; there are slower ones.

I see.

You should live your life like a river.

I can’t be a river. What do you mean?

Enjoy your journey – don’t go too fast or too slow. Bring life to others by helping those in need; use your time, talent, or treasure and your God-given gifts to make a difference in this world. A river is beautiful, majestic, and powerful, just like you.

I should meander.

Ha, but meander with a purpose.

BP

2/2/22

Brady v. Brees

Tom Brady and Drew Brees are meeting in the NFC divisional playoff game today. Tom Brady is 43; Drew Brees is 42 – the oldest match up for quarterbacks in a playoff game. Messrs. Brady and Brees will be first-ballot Hall of Famers when their careers end. Mr. Brees is the NFL leader in passing yards with 80,358. Mr. Brady is second with 79,204. Mr. Brady is the all-time leader for touchdowns with 581, Mr. Brees is second with 571. Mr. Brady ranks eleventh for games played at 301, and Mr. Brees ranks sixteenth. Mr. Brees and the New Orleans Saints won Super Bowl 45, and he was named the games MVP. Mr. Brady is the all-time leader in Super Bowl wins with six, and he was named the Super Bowl MVP four times.

A quarterback aged 40 or more is rare, and these two are defying the odds. Despite their success, they have faced criticism and doubts. The San Diego Chargers traded Mr. Brees in 2005 after successful shoulder surgery. I bet the Charges wished they had kept him on the roster. He continually faces criticism about his height and arm strength. Phil Simms said, “Listen, his arm strength was never great.”

Tom Brady was the 199th pick, drafted in the 6th round, a snub he has not forgotten. In 2016, Max Kellerman “decided to declare that Brady’s career was about to be over sooner rather than later.”[1] He also called him “a bum.” After four years, Mr. Kellerman admits he was wrong about Tom Brady’s late-term playing career.

I’ve never met Tom Brady or Drew Brees, but I suppose they ignore the criticisms, and they probably aren’t aware of most things said about their potential “demise.” Rather than listen to the experts, they work out regularly, practice often, eat well, and repeatedly perfect their craft – they follow their plan and focus on what they can control.

The average NFL career lasts 3.3 years.[2] Mr. Brady is playing in his twenty-first season, Mr. Brees is in his twentieth. To survive and excel in the NFL for two decades requires perseverance, dedication, and tenacity – traits these two NFL greats have in abundance.  

As an investor, you may face criticism and doubt about your investing style or portfolio. TV personalities, experts, analysts, relatives, neighbors, friends, or social media trolls may give you pause to think about your financial future. You may hear others say: “How come you own that company?” or “Why don’t you own this company?” or “The stock market is going to crash, you should sell your stocks!” Tune out the noise and chatter.

To create generational wealth, focus on those things you can control and ignore the rest. Here is a shortlist of things you can manage.

  1. Savings. How much money do you save per month or year? The amount you save will have the most significant impact on your future wealth. Contribute the max to your 401(k) and IRA. Automate your savings. If you save $10,000 per year for thirty years, you could have more than $1.5 million in assets when you’re ready to retire.
  2. Expenses. You have complete control over your spending. The less you spend, the more you save. January is an excellent time to review your spending habits. If you spend some time pouring over your bank and credit card statements, you may find a few expenses to reduce or eliminate.
  3. Investments. You can purchase any investment in the world – stocks, bonds, real estate, gold, Bitcoin, art, jewelry, etc. However, if you want to retire in style, it’s best to own investments that grow, like stocks. The 100-year average for stocks has been 10%. If you keep most of your money in cash, it will lose value every year because of inflation and taxes.
  4. Diversification. Diversify your assets across stocks, bonds, and cash and rebalance your portfolio annually. Diversification is considered a free lunch on Wall Street.
  5. Plan. Your financial plan is unique to your situation. To succeed as an investor, buy investments you’re comfortable owning and follow your plan; it is your financial playbook, guiding you to long-term success.

Investing is not a sporting event, but it does require a game plan with long-term strategic thinking to succeed.

If you’re wondering, Brees holds an edge over Brady in games won – 5 to 2.

“Don’t ever underestimate the heart of a champion.” ~ Rudy Tomvanovich

January 16, 2021

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

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


[1] https://www.sportscasting.com/max-kellerman-finally-admits-he-was-wrong-about-tom-brady-becoming-a-bum/

[2] https://www.espn.com/blog/nflnation/post/_/id/207780/current-and-former-nfl-players-in-the-drivers-seat-after-completing-mba-program

Thankful

As we approach Thanksgiving, here are twenty things I’m thankful for in 2020.

  1. Family
  2. Friends
  3. Faith
  4. Neighbors
  5. Pets
  6. Health
  7. Long walks
  8. Good books
  9. Provision
  10. Democracy
  11. Zoom
  12. Netflix
  13. Amazon
  14. Barbeques
  15. Vaccines
  16. The Dodgers
  17. The Lakers
  18. My guitar
  19. Fly Fishing
  20. Holidays

Do not be anxious about anything, but in every situation, by prayer and petition, with thanksgiving, present your requests to God. And the peace of God, which transcends all understanding, will guard your hearts and your minds in Christ Jesus. ~ Philippans 4:6-7

Happy Thanksgiving!

November 23, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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. Turkey with mashed potatoes, gravy, corn, and crescent rolls is my go-to meal on Thanksgiving. What is yours?

Forever?

Exxon Mobil is leaving the Dow Jones Industrial Average after 92 years. They joined the Dow in 1928, and it’s considered one of the bluest of blue chips – a stock to own forever. Salesforce will take its spot. It’s not the first perennial holding to be substituted by a newer, swankier company. Walgreen’s replaced General Electric in 2018 after a 112-year run and Apple supplanted AT&T in 2015 after 99 years. The three former Dow Jones members spent a combined 303 years in the popular index. Procter & Gamble is now the longest-tenured company in the Dow at 88 years.

For decades, shareholders of Exxon, GE, and AT&T considered themselves set for life. A portfolio consisting of these three companies turned $30,000 into $1.2 million from 1983 to 2016, generating an average annual return of 11.8% – far outpacing the S&P 500. Yet, from 2016 through 2020, this three-stock portfolio has fallen 45% while the S&P 500 is up 68%, a difference of 113%![1]

XOM_GE_T_chart (1)

From 1930 to 1960, Exxon, GE, and AT&T were a few of the largest companies in the world, and AT&T held the top spot for four decades. Exxon was the largest company in the world in 2011.[2] It’s now the 34th largest company in the US.

Big Board

In addition to the long-term investment success of this blue-chip triad, they generated significant dividend income over the past three decades. Exxon’s dividend yield averaged 3.15%, GE’s average payout was 2.95%, and AT&T paid 4.54%. These former juggernauts raised their dividends by an average of 495% during this stretch.

However, time’s change and Exxon’s revenue has declined 31% over the past decade, and its dividend payout ratio is 207% – an extremely high metric. Exxon’s stock price has risen 68 cents over the past twenty years, and GE’s stock hasn’t budged a dime in twenty-eight years. AT&T has followed a similar path. Its share price is down more than 40% from its 1999 peak.[3]

Cisco Systems is an excellent example of not getting married to a stock. Its share price soared 3,500% from 1995 to 2000. By 2002, it had fallen 85%. Over the past twenty years, it’s down 42%, and it has never returned to its all-time high of $72.19 set in April 2000.[4]

CSCO_chart

Today, Facebook, Amazon, Apple, Netflix, Google, Microsoft, and Tesla are the largest companies, and investors plan to own them forever. And rightfully so. If you owned a basket of these high-flyers, you’d be up 97% this year! It’s hard to imagine that one of these companies could follow the fate of Exxon, GE, or AT&T, but it’s possible.

What should you do if you own a stock that you want to hold forever? Here are a few suggestions.

  • If your company is performing well, and it’s meeting your needs, do nothing. Let it run.
  • If the stock becomes a significant percentage of your wealth, consider reducing it, and redeploying your capital into another company or two. What is a large percentage? When your stock approaches 10% or more of your portfolio, start paying extra attention to it. When it breaches 25%, sell some shares to drop your weighing to 10% of your account balance or lower.
  • Trust, but verify. Review earnings reports and company announcements. Is the trend intact? Are they generating positive revenue, earnings, and cash flow? Is the company innovating and producing products and services people will use? If so, hold on to the stock.
  • Keep an eye on management. Steve Jobs, Bill Gates, Jeff Bezos, and Elon Musk are legendary leaders and visionaries. A strong management team is a crucial component to the success of a company, so keep an eye on their lieutenants as well. You can track critical employees on Morningstar or Yahoo! Finance.
  • Take profits. It’s okay to take profits after a strong run. Apple and Tesla announced stock splits a few weeks ago, and their stock prices have risen 31% and 47%, respectively. After a substantial gain, it’s okay to trim your holdings to lock in a profit.
  • Average up. Most people are comfortable averaging down, but few like to average up. What is averaging up? Let’s say you purchased 100 shares of Apple at $150 in 2019, and you bought more at $250 and $350 and $450. Your average cost is $300. Apple is currently trading for $500 per share, so your gain is $200, or 67%, despite buying the stock at higher prices.
  • Sell it. If your company’s fortunes change, sell it, and move on to a new company. There are thousands of companies and investment opportunities, so don’t get wedded to a stock.

Owning great companies is one of the best ways to create wealth and concentrating your holdings into a few stocks can magnify your returns. But, it’s essential to review your investments regularly to make sure they’re meeting your goals and objectives. Do not ignore fundamentals and pay attention to popular trends. Times change and being flexible to pivot to new ideas will allow your account to grow over time.

The bigger they are, the harder they fall. ~ Anonymous

August 26, 2020

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

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

 

[1] Morningstar Office Hypotheticals – April 1983 to July 2020

[2] Dimensiional Funds

[3] YCharts

[4] Ibid

PWM Weekly Stock Market Update

Happy Saturday,

Investors sold stocks this past week as they reacted to economic data and assorted reports on Covid-19. The economic data was bad but expected. Retail sales fell 16.4%. The previous low was negative 3.67% during the Great Recession. Manufacturing output fell by 13.7%, the most significant decline since 1919.[1] Industrial production dropped 11.2%.

The market was also startled by Federal Reserve Chairman Jerome Powell’s comments when he said the economic outlook is still “highly uncertain and subject to significant downside risks.”[2] And one billionaire hedge fund manager said, “this is the second-most overvalued market, behind only ’99.”[3] But he also purchased shares of Twitter, Microsoft, Wells Fargo, Micron, Netflix, and Energy Transfer LP.[4] Do as I say, not as I do?

Bankruptcies continue to pile up, including J.C. Penney’s, Frontier Communications, Gold’s Gym, True Religion, Ultra Petroleum, and Diamond Offshore.

The House passed a $3 trillion Coronavirus Relief Bill.

Tesla will build its next factory in Austin, Texas – Hook ‘em!

Consumer confidence rose this week.

The number of air travelers has increased by 160% since the April lows, according to the TSA website. As one client mentioned to me, “He can’t wait to drink a beer in a crowded airport.”

OpenTable® restaurant reservation data continues to improve.

Here is how stocks, bonds, and alternative asset classes performed this past week.

  • The S&P 500 fell 2.33%%
  • The NASDAQ fell 1.05%
  • Small-Cap Stocks fell 7.56%
  • Real Estate Stocks fell 7.76%
  • International Stocks fell 3.15%
  • Emerging Markets fell 2.03%
  • Bonds rose .47%
  • Gold rose 2.19%
  • Energy Stocks fell 6.79%

Captain Lawrence G. Getz III is the Commanding Officer of the University of Michigan’s Navy ROTC program and a Navy helicopter pilot. He flew more than 2,500 hours, including 500 combat hours. For his service, he earned the Defense Superior Service Medal, Legion of Merit, and two Meritorious Service Medals, to name a few. I recently asked him how he dealt with his emotions while flying. He said, “Compartmentalize your emotions, put them in a box, and execute your plan. Being afraid is normal, but do not make emotional decisions in highly volatile times. Do not make decisions in fear.”

We should follow Captain Getz’s advice. Reacting to fear and emotion can have long-term consequences for your family’s wealth. It’s imperative to follow your plan and focus on your goals. Difficult times will fade, and the stock market has always recovered. I sound like a broken record, but the poor stock market performance has not harmed our client’s financial plans. Be strong and keep the faith.

“Great things never came from comfort zones.” ~ Anonymous

Have a great weekend!

May 16, 2020

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

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

 

[1] https://www.wsj.com/articles/coronavirus-lockdowns-trigger-record-spending-drops-on-shopping-eating-out-11589535000?mod=hp_lead_pos1, Harriet Torry, May 15, 2020

[2] https://markets.businessinsider.com/news/stocks/negative-interest-rates-not-considered-federal-reserve-policy-jerome-powell-2020-5-1029198208, Ben Wick, May 13, 2020

[3] https://www.cnbc.com/video/2020/05/13/david-tepper-this-is-second-most-overvalued-market-behind-only-99.html website accessed May 15, 2020

[4] https://whalewisdom.com/filer/appaloosa-management-lp#tabholdings_tab_link, website accessed May 16, 2020

Who Needs Prayer?

My bible study group has been meeting virtually for the past few weeks because of the Coronavirus, and last night we prayed for twenty-five people from a list (see below) that has been circulating on social media. We incorporated it into our meeting, and it was powerful.

It is a tough time for all, but praying for others gave our group peace and comfort. I’m praying it will do the same for you as well.

The Parable of the Good Samaritan

On one occasion an expert in the law stood up to test Jesus. “Teacher,” he asked, “what must I do to inherit eternal life?”

 “What is written in the Law?” he replied. “How do you read it?”

He answered, “‘Love the Lord your God with all your heart and with all your soul and with all your strength and with all your mind’; and, ‘Love your neighbor as yourself.’”

“You have answered correctly,” Jesus replied. “Do this, and you will live.”

But he wanted to justify himself, so he asked Jesus, “And who is my neighbor?”

In reply Jesus said: “A man was going down from Jerusalem to Jericho, when he was attacked by robbers. They stripped him of his clothes, beat him and went away, leaving him half dead. A priest happened to be going down the same road, and when he saw the man, he passed by on the other side. So too, a Levite, when he came to the place and saw him, passed by on the other side. But a Samaritan, as he traveled, came where the man was; and when he saw him, he took pity on him. He went to him and bandaged his wounds, pouring on oil and wine. Then he put the man on his own donkey, brought him to an inn and took care of him. The next day he took out two denarii and gave them to the innkeeper. ‘Look after him,’ he said, ‘and when I return, I will reimburse you for any extra expense you may have.’

“Which of these three do you think was a neighbor to the man who fell into the hands of robbers?”

The expert in the law replied, “The one who had mercy on him.”

Jesus told him, “Go and do likewise.”

~ Luke 10:25-37

Who is your neighbor?

If you’re not sure who your neighbor is, here is the list of twenty-five people to pray for (Note: I don’t know where the list originated, and it has been sorted randomly).

  1. Delivery Drivers
  2. Pastors and Church Leaders
  3. Singles
  4. Teachers
  5. First Responders and Police Officers
  6. Couples with wedding plans
  7. Grocery Store Workers
  8. Medical Support Teams
  9. Foster Care Families
  10. Those who cannot work from home
  11. Those in abusive situations
  12. Those displaced from their homes
  13. Employees deemed essential who work among the public
  14. Internet-Support Personnel
  15. Government Officials
  16. COVID-19 Cleaning Workers
  17. High School and College Students
  18. Small business owners and employees
  19. People struggling with anxiety, depression, and other mental illnesses
  20. Counselors and Therapists
  21. Those facing job layoffs
  22. Developing Nations
  23. Military Personnel and Their Families
  24. Expectant Parents
  25. The homeless and those in deep poverty

Who needs prayer? Everybody. Be safe and keep the faith.

Rejoice always, pray without ceasing, give thanks in all circumstances; for this is the will of God in Christ Jesus for you. ~ 1 Thessalonians 5:16-18

April 28, 2020

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

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

 

 

 

 

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.