And Down The Stretch They Come!

Dave Johnson is known for this call, “And down the stretch they come!” Mr. Johnson has been calling horse races since the early 1970s, including the Kentucky Derby, Preakness, and Belmont Stakes. There are few things more exciting in sports than watching horses make the final turn towards the finish line – the stretch run.

We’re entering the fourth quarter, and 2021 is less than 100 days away – thankfully. We are in the stretch run. When horses enter the starting gate, the optimism is high; each horse has a chance to win. As the race progresses, the fastest horse separates itself from the field, and jockeys need to adjust their strategy to catch the leader. This year started with much hope, especially after a stellar 2019. The Dow Jones was up  3% through February before the world imploded with the Coronavirus. As the pandemic spread, the market fell 37%. For the past six months, we had to adapt to a new normal – masks, social distancing, self-quarantines, Zoom Calls, hand sanitizer, and a shortage of toilet paper. Hopefully, we finish the year on a positive note with strong momentum for 2021.

As we approach the end of the year, what can you do to enhance your investment portfolio for 2021 and beyond? Here are a few suggestions.

  • Let your winners run. A jockey who is riding a winning horse needs to hold on to finish the race as Ronney Turcotte did when he rode Secretariat during the home stretch of the Belmont Stakes in 1973. If you’re sitting on winning stocks, hold them until next year before realizing your gains.
  • Sell your losers. If you own a stable of losing stocks, sell them to realize your losses for this year. You can offset your gains dollar for dollar, and if you don’t have any profits, you can carry your losses forward forever. Hall of Fame pitcher Don Drysdale sold his racehorses because he said the slow ones eat as much as the fast ones.
  • Diversify your holdings.  Owners and trainers race several horses during a season – some win, some lose. A globally diversified portfolio of stocks, bonds, and cash will allow you to finish in the money more often than not. Spread your bets across several sectors.
  • Review your accounts. What worked and what didn’t? Analyzing your results is vital for investment success. Are you still on pace to achieve your financial goals? If you’re not sure, give us a call. We can help.
  • Adjust. What changes do you need to make for 2021? Is your portfolio sturdy enough to weather all types of market conditions? What changes can you make today to better position your investments for a profitable run next year?
  • Look for long shots. The technology sector will likely lead wire to wire this year, but sectors like energy and financials were left stuck in the mud. Look for investments that may rebound next year.
  • Celebrate your success. Are your investments on pace to finish the year in positive territory? Will you be in the winner’s circle at the end of the year? If you were financially successful, consider sharing your winnings with those in need. Donating money to a non-profit will benefit others and help you reduce your taxes – a win, win.

This year has been brutal, and it can’t end fast enough. We are in the stretch run, so use these next few months to get your house (barn) in order. I know you can do it. I’m betting on you to win big next year.

Riders up.

Do you give the horse its strength or clothe its neck with a flowing mane? Do you make it leap like a locust, striking terror with its proud snorting? It paws fiercely, rejoicing in its strength, and charges into the fray. It laughs at fear, afraid of nothing;  it does not shy away from the sword. The quiver rattles against its side, along with the flashing spear and lance. In frenzied excitement it eats up the ground;  it cannot stand still when the trumpet sounds. At the blast of the trumpet it snorts, ‘Aha!’ It catches the scent of battle from afar, the shout of commanders and the battle cry. ~ Job 39:19-25

September 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.

The Pendulum

The passing of Justice Ruth Bader Ginsburg is a tragic loss. I learned about her life from the movie On The Basis of Sex, and I’ve enjoyed reading the recent articles about her accomplishments. She opined on many issues, and one quote from a 2017 interview with the BBC particularly stood out to me.  Justice Ginsburg said, “I am optimistic in the long run. A great man once said that the true symbol of the United States is not the bald eagle. It is the pendulum. And when the pendulum swings too far in one direction, it will go back.”

As an investor, the pendulum analogy resonated with me because markets, all markets, have wide gyrating swings and rarely remain stagnant. Since 1926, the S&P 500 has generated an average annual return of 10%, but it has never closed a calendar year with a 10% gain. The range of returns has been far and wide. In 1931 the S&P 500 fell by 43%; in 1933, it rose 54%. Extreme market moves are not limited to stocks. US long-term interest rates rose from 6% to 15% from 1972 to 1982. They fell back to 6% in 1992. The spot price for West Texas Intermediate Crude climbed to $133 from $47 in three years. It would collapse back to $47 one year after reaching its peak price. Gold hit a high of $637 per ounce in 1980, and it did not breach this price again until 2007. Recently, gold climbed above $2,000 per ounce, passing the previous high set in 2011. It dropped 42% from 2011 to 2015. Markets are continuously moving, which is emotionally challenging for investors.

When a trend is in place, investors assume it will last forever, and forever is a long time. From January 1995 to March 2000, the NASDAQ rose 542%. Convinced it would continue, individuals were buyers of stocks. It peaked in March 2000 and then fell 75%. It would not eclipse its previous high for another fifteen years.

Growth stocks have outperformed value stocks for the past two decades, and investors are confident value is dead. A Google search for “Is value dead?” will produce thousands of articles. At some point, value will beat growth, but no one knows when this will occur.

A shifting market can be beneficial to investors. When the pendulum swings too far to the left and stocks become cheap, use it as an opportunity to buy great companies at lower prices. When it swings too far to the right and stocks become overvalued, sell some shares to lock in your profits. A market in motion is favorable to the enterprising investor.

What if you don’t want to own fluctuating investments? Can you altogether avoid risk? Yes, in the short term. The one-month US T-Bill has never lost money if held to maturity. It’s considered the safest investment in the world. Of course, you won’t make money either after taxes and inflation. The 94-year average annual return for the one-month T-Bill has been 3.3%, and inflation averaged 2.9%, so your net return, before taxes, was .4%. A $1 investment in 1926 was worth $22 in 2019. The same $1 invested in the S&P 500 increased to $9,237, or 41,886% more than the safe investment.[1]

Of course, no trend lasts forever. The Boston Red Sox and Chicago Cubs were cursed never to win another World Series until they did in 2004 and 2007, respectively. In 2016, the Cleveland Cavaliers won the NBA championship, the cities first major sports title since 1964.

If trends don’t last forever, how can you take advantage of an ever-changing market?

  • Plan. Set goals. A financial plan can help you prioritize and quantify your goals. It can also keep your emotions in check as you oscillate between greed and fear.
  • Diversify your assets. Diversification allows you to own several asset classes like stocks, bonds, and cash.  A diversified portfolio exposes you to a wide variety of investments, some of which should perform well.
  • Cash. Allocating a portion of your portfolio to cash gives you a chance to purchase stocks when they fall.
  • Take Profits. When stocks or bonds rise above your price target, sell some shares, and lock in your profits.
  • Rebalance. Rebalancing your portfolio once or twice per year will help you maintain your risk level and asset allocation. Automating this process will help you to buy low and sell high without emotion.

Markets fluctuate, it’s what they do, so don’t worry when the pendulum swings too far to the left or right. Rather than worrying about extreme cycles, focus on your plan and goals – and the facts of the case.

“So often in life, things that you regard as an impediment turn out to be great, good fortune.” ~ Justice Ruth Bader Ginsburg

September 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.


[1] Dimensional Matrix Book 2020

Hope Is A Strategy

Hope is in short supply, and people are hurting. We’re battling a global pandemic, fires, floods, racial tension, economic uncertainty, and political turmoil – dark days, indeed. It’s hard to imagine it getting better, but it will. Try to find the good among the bad. Mr. Rogers once said, “When I was a boy, and I would see scary things in the news, my mother would say to me, ‘Look for the helpers. You will always find people who are helping.'” Great advice. There’s always a silver lining. It takes courage to rely on hope and faith, but it’s essential that you do if you want to succeed.

What is hope? Webster’s dictionary defines it as a desire with expectations of obtainment, and to expect with confidence.  Powerful words. In addition to confidence, it takes patience, humility, and wisdom to rely on hope because we can’t see it or touch it. It’s not tangible.

The investment community says hope is not a strategy, but I disagree. Financial planners and investment managers, including me, tell clients they must plan to achieve their goals. It’s true, a financial plan is needed, but you also need hope, especially when the stock market crashes as it did in March. As Mike Tyson said, “Everybody has a plan until they get punched in the mouth.” When your plan is not working and the days are dark, you need faith that things will be better tomorrow. Hope implies optimism.

I rely on financial planning software, Excel spreadsheets, and my faithful HP12c calculator to help clients obtain their goals. I also use these resources for my business. When I launched my firm five years ago, I was full of hope and faith. It’s all I had. I was confident my business would flourish, so I didn’t worry about not having clients. I pursued each day with optimism. And, day by day, I built my business.

In helping others reach their financial goals, I must have faith in the long-term trend of the stock market and the resilience of the American economy. I have centuries of data supporting my thesis when I talk to clients about their future, but the information is historical. It already happened. How do I know it will continue? How do I know the stock market will be higher 100 years from now? I don’t, nor does anyone else. It’s a guessing game. However, as history as our guide, I like our odds of success.

When times are tough, like now, it’s imperative to have faith in the future. I was talking to a client this week who is struggling.  We talked through a few issues, and I suggested focusing on the good things and to look at all the positive signs in his life. It’s hard to be upbeat, but it’s necessary to keep moving forward.

Here are a few suggestions to help you keep moving forward.

  • Serve others. Volunteer your time to help those in need. Serving people who can only repay you with a smile, hug, or handshake is time well spent.
  • Donate. If you have financial assets, consider donating money to your local food bank or soup kitchen. A Google search for non-profits in your neighborhood will produce several results. Pick one and send them a check.
  • Deliver. Do you know a neighbor who can use a helping hand? Cook them a meal. Mow their lawn. Wash their car. Buy them a cup of coffee. Listen to their story.
  • Sing. It’s hard to feel sorry for yourself when you’re singing, especially with others. For the record, I have a horrible voice, and I can’t sing, but I do it anyway.
  • Mentor. Kids need mentors and tutors now more than ever as schools shut down, and parents return to work. Do you have time to help someone with their studies?
  • Plant. Plant some trees, bushes, or flowers. Start a garden. Add some color to your backyard. Hang up a hummingbird feeder or install a birdbath.
  • Laugh. Watch a comedy or read the comics. My family has a collection of Far Side cartoons by Gary Larson. We flip through the pages occasionally to get a belly laugh.
  • Exercise. A walk or run can give you a quick reset. Play tennis or golf. Ride a bike. Go for a swim.
  • Watch. Wake up early to watch a sunrise or gather some friends to view a sunset. When I lived in Mission Beach (San Diego), hundreds of people would walk to the boardwalk to look at the sunset. I’ve never been disappointed by the beauty of nature.
  • Adopt. A dog or cat can bring joy to your household. Visit your local humane society to adopt an animal. If you don’t want to care for a pet, watch some Youtube videos about animals – it will put a smile on your face.
  • Pray. Plug into a higher power source.  

As a nation, we have endured worse. It’s a difficult time for all, but it will pass. Focus on the things you can control, don’t worry about tomorrow, and keep the faith.

Gotta have hope!

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

September 18, 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.

Do You Need To Beat The Market?

Investors want to crush the stock market, and rightfully so, but is it necessary? Must you beat the stock market to reach your goals? Since 1926, the S&P 500 has generated an average annual return of 10.1%. If you earn 10% per year, your money will double every seven years. Allocating all your assets to stocks may allow you to better the market’s returns, but it isn’t likely, especially over time. And, once you start to diversify your portfolio by adding bonds or real estate or international stocks or cash, you probably will only better the market in down years, and who wants to be the best loser? As Ricky Bobby said, “If you’re not first, your last.”

According to a recent Wall Street Journal article: “Members of the American Association of Individual Investors found that they overestimated their own investment returns by an average of 3.4 percentage points a year relative to their actual returns, and they overestimated their own returns relative to those of an appropriate benchmark by 5.1 percentage points.”[1]

However, all is not lost if you don’t outperform the S&P 500. In fact, you can do quite well by not posting above-average returns. What matters most to your financial future is saving and longevity. The more money you can save, and the longer you can do it,  the better your financial foundation will be. For example, my daughter opened a Roth IRA a few years ago. If she invests $6,000 per year for fifty years in a generic balanced fund, her account balance could be worth more than $6.5 million.

To dig into balanced funds deeper, let’s look at a few managed by Putnam, American Funds, Fidelity, Schwab, and Vanguard. The average allocation for these funds is 61% stocks, 34% bonds, and 5% cash – an allocation some financial experts consider a relic.

George Putnam Balanced Fund (PGEOX). Launched in 1937, this balanced fund has generated an average annual return of 8.91%. Investing $10,000 per year from inception is now worth $144 million! However, if you invested all your money in the S&P 500, it would be worth about $310 million today. You trailed the market by $166 million. By not investing in the market, you “lost” more than you made. If this fund was in your account today, would you be disappointed with a balance of $144 million? I doubt it.

American Funds American Balanced Fund (ABALX). Since 1975, this balanced fund produced an average annual return of 9.99%. Investing $10,000 per year from July 1975 to August 2020 is now worth $8.03 million. If you invested in the S&P 500 instead, you’d be worth $10.5 million. Would you be upset with $8 million in your bank account? Unlikely.

Fidelity Balanced Fund (FBALX). Since 1986, the Fidelity Balanced Fund has averaged 9.26%. A $10,000 annual investment, for 34 years, is now worth $2.25 million. It also underperformed the S&P 500. If you allocated 100% of your assets to the S&P 500, your balance would be $2.7 million. Are you offended with an investment account balance of “only” $2.25 million? Probably not.

Schwab Balanced Fund (SWOBX). Schwab’s balanced fund started in 1996, and it has generated an average annual return of 7.15%. Investing $10,000 per year for 24 years produced a gain of $629,000. A similar investment in the S&P 500 would be worth about $850,000. You underperformed the market by more than $200,000, but you still have $629,000.

Vanguard Balanced Fund (VBAIX). Vanguard’s fund is twenty years old. It opened for investing in 2000 at the top of the Tech Wreck and the start of the lost decade. Despite starting a fund at one of the worst times in history, the Vanguard Balance fund still produced an average annual gain of 8.29%. Investing $10,000 per year, for twenty years, is now worth $502,000. Like the other funds, it underperformed the market, but you still have a half-million dollars in your account, not too shabby.

Despite these five stellar funds underperforming the market, they produced phenomenal gains for shareholders. The average annual return for these funds has been 8.72%. Year-to-date, they’re up 7%, and for the past year, they’ve increased 13%.

If the S&P 500 offers such stellar returns, why not allocate 100% of your assets to stocks? You can, of course, if you have the temperament, but I’ve found most investors don’t have the fortitude to invest all their money in the market, especially when stocks fall by 30%, 40%, or 50% as they did in 2000, 2008, and 2020. Investors prefer a balanced portfolio of stocks, bonds, and cash based on their long-term goals. Rather than focusing on the market, pay attention to your goals, save your money, follow your plan, and pursue a balanced life.

“Be moderate in order to taste the joys of life in abundance.” Epicurus

September 10, 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.

Fund data provided by YCharts and Morningstar.

Picture Credit: Orla, IStock Photos


[1] https://www.wsj.com/articles/investors-still-believe-they-can-beat-the-stock-market-11599491572?mod=searchresults&page=1&pos=1, By Meir Statman, September 7, 2020

Our Fifth Anniversary

It’s been five years since I started my investment firm, Parrott Wealth Management, and, so far, so good. At age 50, I was tired of working for others, so I acted on faith and started my own company. According to Entrepreneur, my odds of survival were 50/50.[1] The author of the article said companies fail because of a lack of focus and motivation or pride.[2] Thankfully, I was motivated to succeed, and I checked my ego at the door.

As a financial planner, I put my planning skills to the test before I started my company. I relied on Excel spreadsheets and my HP12C to crunch numbers to see if my head matched my heart.  I investigated numerous sites on starting a business, read several books, talked to a few people, and prayed always. Running also helped. I ran the San Diego marathon the year I started my business, so I had plenty of time to think through different scenarios on my long runs around Lady Bird Lake and the City of San Diego.

During the summer before my official launch date, I was vacationing at Wind River Ranch in Estes Park, Colorado.  At the entrance to the ranch, the words from Psalm 46:10 are written in stone: “Be still, and know that I am God.” Each morning my wife and I attended a bible study led by Pastor Chris. He spent the week talking about addressing our fears. He and I spoke about his sermons while fishing and hiking; His teachings and insights gave me the courage to act.

At home, I’m part of a men’s bible study. As I was contemplating starting my business, I looked at the other men in the room – all but two were self-employed. If God took care of them, he would do the same for me.  

As I review the past five years as a business owner, I was never afraid or fearful. I had trust in my analysis and my process. My plan was working.  I had faith that God would provide for my needs, and He has, and then some. Here are a few takeaways from our firm’s success.

  • Plan. Before starting my firm, I spent many nights crunching numbers for my family’s finances. I made sure I had enough money in the bank to pay for three year’s worth of expenses, including my daughter’s college tuition payments. I had the financial resources to proceed.
  • Exit. I created a stop-loss for my savings account. If my bank balance dropped below $50,000, I would shutter my business and rejoin corporate America.
  • Spend. I spent a lot of money on the necessities – office space, software, logos, websites, etc. I wanted to offer clients and prospects the same services they would find at larger firms. I also wanted to appear bigger than a one-person shop.
  • Hire. In 2017, I added Janet Jackson as the Director of Client Services. She has allowed me to pursue other activities to grow the firm while handling back-office operations.
  • Try. I tried numerous strategies and pursued many markets as I built the firm – some stuck, most didn’t.
  • Review. I’m continually reviewing strategies and data to make sure our firm is on the right path. I participate in several benchmarking studies, so I know where my firm ranks relative to the competition.
  • Listen. Soliciting feedback from clients, friends, partners, etc. has been vital. Based on their input, I’m able to adjust the firm’s direction.
  • Boundaries. I receive several calls from wholesalers, phone companies, lead providers, advertising specialists, and so on, all wanting a few minutes of my time so they can better understand my business model. I say no, a lot. I don’t clog my calendar with activities that will not benefit my firm or our clients.
  • Thanksgiving. I feel blessed to work for myself. I’m thankful I had the opportunity to start my own company, work with fantastic clients, and hire a great employee.

The Entrepreneur article I referenced earlier gives a business a 30% chance of survival after ten years. Who knows what the future holds, but I like our odds.

“Being self-employed means you work 12 hours a day for yourself, so you don’t have to work 8 hours a day for someone else.” ~ Oliver Markus Malloy,

September 8, 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] https://www.entrepreneur.com/article/288769#:~:text=In%20a%20study%20by%20Statistic,70%20percent%20after%2010%20years., Patrick Henry, February 18, 2017.

[2] Ibid

A Biden Victory?

According to the recent Quinnipiac poll, Joe Biden is leading Donald Trump by 15 points – 52% to 37%.[1] Of course, much can happen between now and the election on November 3, but if the trend continues, Mr. Biden will likely become the 46th President of the United States.

Investors are primarily concerned about Mr. Biden’s tax policy. A few of his proposals include raising the top individual tax rate to 39.6% for incomes exceeding $1 million. The long-term capital gains rate would jump to 39.6% from 20% for this cohort. He wants to eliminate the step-up cost basis on estate transfers. For example, let’s say you purchased Amazon for $1, and on the day of your death, it closes at $3,500. Currently, your beneficiaries will inherit Amazon at $3,500, and they will not have to pay any taxes upon receipt. Their stepped-up cost basis is $3,500. Under Biden’s proposal, your beneficiaries would inherit your cost basis of $1, so if they sell it, they’ll have a capital gain of $3,499 per share, and they could be taxed at a rate of 39.6%.[2]

Biden’s proposal will also impact the Social Security Tax.  The Social Security tax of 12.4% is capped on incomes up to $137,000. Mr. Biden would extend the tax to those individuals making more than $400,000.[3] He would limit itemized deductions to 28% on high-income earners and raise the corporate income tax rate to 28% from 21%.[4]

Here are a few steps you can take if Mr. Biden wins, and you’re concerned about your taxes increasing.

  1. Sell your stocks and realize your gains. The top capital gains tax rate is 20%, and for most individuals, it’s 15%.
  2. Sell your stocks and realize your losses. If you have securities trading in negative territory, realize your losses so you can offset gains at a later date. The current tax code allows you to offset losses and gains dollar for dollar. If you don’t have any capital gains, you can carry your losses forward and write off $3,000 per year until your losses are absorbed.
  3. Invest in tax-free municipal bonds. If you live in a state with high taxes like California or New York, the tax-free rate can be substantial. For example, a California tax-free bond paying 3%, would be the equivalent of a taxable bond paying 6.3% for an individual in the highest brackets. If you live in a state with an income tax, you must purchase bonds from your state to receive tax-free income. If you live in Texas or Florida, you can buy bonds from any state in the country.
  4. Limit your stock purchases to your IRA or 401(k). Investing in stocks or stock funds in your IRA will allow you to realize gains without paying taxes. Your dividend income will be free of current taxes as well. However, you will not be able to recognize losses, and when you withdraw money from your IRA, it will be taxed as ordinary income unless it’s a Roth IRA.
  5. Convert your traditional IRA to a Roth. You’ll experience a bump in taxes this year, but your distributions will eventually be free of taxation. And, if you convert to a Roth, you never have to take out your money unless you need it for living expenses or some other purpose.
  6. Invest in a Roth 401(k). The Roth 401(k) does not have any income limits, so it is available to all employees. The maximum contribution is $19,500, and if you’re 50 or older, you can add another $6,500. When you leave your employer, you can roll it over to a Roth IRA.
  7. Invest in collectibles like art, jewelry, watches, cars, or antiques. These items do not generate income, and they may increase in value. Furthermore, they’re easy to transfer from one generation to the next.
  8. Buy physical gold, silver, or other metals. Like collectibles, precious metals will not produce income, but they can surge higher.
  9. Buy raw land. Raw land may give you tax breaks like an agricultural or wildlife exemption. Your land will not generate income, but it can grow over time. Unlike collectibles or precious metals, your land will pass by title to your beneficiaries, so it could trigger a tax on the transfer.
  10. If your estate is large, you can lower it through your annual gift tax exclusion. The IRS allows you to give away $15,000 per person per year. The current lifetime exemption is $11.4 million.
  11. Donate to charities you support or cherish through a direct gift of cash or stock.
  12. Use a charitable vehicle like a donor-advised fund or charitable remainder trust to front-load your donations. You will receive a tax deduction based on your gift, and you can defer your distributions to a later date, including your death.
  13. You do not need to make any changes today. I was talking to a client yesterday about some of these strategies, and she said she could wait until November 4 to make any changes.

The election will occur in 67 days, so you’ll know if you need to make any adjustments to your portfolio before the year is over. I would caution you, however, to make significant changes to your investments regardless of who wins. As you know, politicians have big ideas while on the campaign trail, but most of them rarely make it to the policy stage. And, if Biden wins, it may take months or years before he implements his suggestions.

Lastly, regardless of who you’re voting for, register to vote. Here is a link to Vote.org: https://www.vote.org/

George Washington is the only president who didn’t blame the previous administration for his troubles. ~ Author Unknown

August 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.

[1] https://poll.qu.edu/national/release-detail?ReleaseID=3666, website accessed August 28, 2020

[2] https://www.cnbc.com/2020/07/21/heres-what-a-biden-presidency-might-mean-for-your-taxes.html, Darla Mercado, CFP®, August 28, 2020

[3] Ibid

[4] https://taxfoundation.org/reviewing-joe-bidens-tax-vision/, Garrett Wilson and Erica York, August 20, 2020

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

The Indianapolis 500

Drivers start your engines!

Today marks the 104th running of the Indianapolis 500 – “The Greatest Spectacle in Racing.” Drivers will travel at speeds of 225 miles per hour or more in pursuit of auto racing’s most iconic trophy. The 1911 winner, Ray Harroun, averaged 75 miles per hour, slower than some currently posted highway speed signs.

Race day is exciting, and the spectacle is legendary. Crowds of people usually pour into the brickyard to be part of the scene, and millions more will watch it on TV.  The singing of our National Anthem, the singing of “Back Home Again in Indiana,” and the stealth bomber flyover add to the enthusiasm of the day.

Most of the attention will be on the 33 drivers, and rightly so, as they’ll be the ones responsible for executing the plan. However, behind them is an army of support staff like strategists, spotters, spouses, and owners. Teams work as one to make sure the driver can win the race by strategizing and planning for a successful outcome. The plan is their road map for the race.  As the race continues, they must adjust their strategy based on new data like car performance, track conditions, and weather.

In addition to a fast car and the driver’s skill, they’ll need a little luck to win. In 2011 Dan Wheldon was trailing the winner until the last lap when J.R. Hildebrand’s car hit the wall on the final turn. Hildebrand’s accident allowed Wheldon to win.  Wheldon would’ve finished second, at best, had Hildebrand not crashed.

Regardless of how fast these cars travel, drivers will pass each other often and spend a majority of the 500 miles jockeying for a position to win. Drivers need to focus on their team goals, trust the process, and not worry about the competition.

Unfortunately, drivers may experience a crash. When this happens, the yellow caution flag will fly, and drivers must slow down for the cleanup crew to clear the track before racing can resume. Accidents and crashes are unexpected, of course, so it’s best to try and minimize the damage. Drivers do not live in fear of a crash, and nor should you.

What can an investor learn from the Indianapolis 500? Here are a few thoughts.

  • Drive your race. People travel at different speeds to reach their goals. If you’re on the right track, don’t worry about others. Your plan only applies to you and your current situation.
  • Create a financial plan. Your plan will help guide you through the race of your life. It will be your roadmap to success.
  • Adjust and review your plan. Drivers adjust their plans based on new data. As you review your plan and goals, you should adapt to new data as well. Flexibility is paramount.
  • Work with your team. A driver relies on their team to win, and your trusted advisors can help you reach your goals. A CPA, attorney, real estate agent, mortgage broker, insurance agent, financial planner, and an investment manager should be in your pit crew.
  • Diversify your investments. In the market, like racing, crashes happen. It’s not possible to predict when they will occur, so your best defense is a diversified portfolio of stocks, bonds, and cash.
  • Celebrate your wins. It’s essential to enjoy the fruits of your labor. If you’ve reached a goal, celebrate it with gusto – and milk!

After 500 miles, the winner will capture the checkered flag, drink their milk, and kiss the bricks at the finish line. The team will celebrate the victory for a few days and then start planning for the next race. You might not pass under a checkered flag when you’ve achieved your goals, but you’ll know when you’ve won your race.

Nothing compares to the Indianapolis 500.  ~ Mario Andretti

August 21, 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 T.D. 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.

My Generation

I love The Who and “My Generation is one of my favorite songs. Rolling Stone magazine considers it one of the greatest songs ever – number 11 out of 500.[1] The song was released fifty-five years ago, and it has been going strong ever since—a classic. Despite being an oldie, it’s still relevant today.

My investment career has spanned more than three decades. A benefit of longevity is that I get to work with generations of investors. During this recent downturn, I had several clients contact me about establishing investment accounts for their children. These kids are in their teens and early twenties. In one case, we created accounts for the fourth generation of family members by opening 529 college education accounts. I love it when young people begin investing.

One benefit of starting your investment strategy when you’re young is time. The longer you allow your investments to grow, the better. A majority of Warren Buffett’s wealth came after the age of 65. He started investing at age 11. According to Dave Ramsey’s Financial Peace University, if Jack invests $2,400 every year from age 21 to 30 and stops, he will accumulate $2.5 million by age 67. If Blake waits until age 30, and he invests $2,400 every year for 38 years, his account will grow to $1.48 million. Despite investing more money for longer, Blake fell about $1 million short of Jack.[2]

Here are a few ideas if you want to help your children or grandchildren build an investment portfolio.

Start small. Small companies historically outpace large companies. And, small companies eventually grow into large ones. According to Dimensional Fund Advisors, small companies produced an average annual return of 13.8% for the past 40 years, while large companies averaged 11.8%.[3] Apple is the largest company in the world measured by its market capitalization, but it once was a small company.

Buy individual stocks. A popular theme on Wall Street is to buy what you know. If you own an iPhone, buy Apple. If you wear Nike shoes, buy Nike. You can buy shares in any company you want. The advantage of this strategy is you can control what you own. The disadvantage is the lack of diversification and potential cost. For example, Amazon sells for more than $3,250 per share!

Buy mutual funds. A mutual fund will allow you to invest a small dollar amount into a fund of your choice – $25, $50, etc. The mutual fund manager will invest your dollars alongside other shareholders to buy several different companies. A mutual fund is also a great way to establish a monthly investment program. A disadvantage of a mutual fund is you won’t have any control over what you own. A mutual fund, for most, is the best choice for new investors, regardless of age.

Open a Roth. If you’re working, you can open a Roth IRA. A Roth allows your money to grow tax-free for decades. You can contribute $6,000 per year or 100% of your salary, whichever is less. If you buy and sell stocks inside a Roth, you do not have to pay capital gains taxes. When my daughter started working a few summers ago, we contributed 100% of her salary to her Roth.

Open a brokerage account. A taxable brokerage account will allow you to access your money at any time, for any reason – college, a new car, a trip, a house, and so on. The IRS will treat your trading activity as a capital gain or loss.

Slice and dice. Investment firms like T.D. Ameritrade, Schwab, and Robinhood allow you to buy and sell stocks and Exchange-Traded Funds (ETFs) without commissions. These companies may offer partial share trading, or slices, as well. For example, I mentioned Amazon trades for $3,250. If a firm allows for partial share trading, you can invest $100 in Amazon.

Keep your fees low. In addition to commission-free trading, keep your mutual fund fees low. All funds have operating expense ratios (OER), so read the small print. The lower the OER, the more money you get to keep. Index funds typically have low fees relative to other types of mutual funds.

Embrace volatility. Stocks fluctuate – daily. If your stock or fund drops, use it as an opportunity to buy more shares. Apple stock is up 1,300% over the past decade; however, it fell 40% in 2012, 25% in 2016, 32% in 2018, and 26% in 2020.[4] Don’t fear down days. Long-term wealth is created during the depths of a bear market.

Concentrate. Concentrate your investment holdings to a few companies or funds. Find a few great investment ideas and invest heavily in them.

Diversify. As your account grows, take some profits to buy more companies. For example, if you invest in a company and it doubles, sell half and purchase another stock.

Set goals. Why are you investing? How do you plan to use the money? Writing down your investment goals will make you a better investor. It can also help you to stay invested during market downturns.

Read. Your secret weapon to finding great investment ideas is reading. Here are a few of my favorite investment books.

  • One Up on Wall Street – Peter Lynch
  • The Only Investment Guide You’ll Ever Need – Andrew Tobias
  • The Wealthy Barber – David Chilton
  • How to Make Money in Stocks – William J. O’Neil
  • The Millionaire Next Door – Thomas Stanley
  • Everyday Millionaires – Chris Hogan

Review. Analyzing your investments will make you a better investor. Winners are great, but we can learn much by analyzing our losers.

Investing is a long-term journey, so be patient. My recommendation is to grow rich slowly. If you think generationally, it will allow you to ignore the daily fluctuations in the market and let your money grow over time. If you pursue risky, short-term gains, you may become frustrated and potentially give up on investing. Don’t be greedy.

Good habits formed at youth make all the difference. ~ Aristotle

August 21, 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 T.D. 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.rollingstone.com/music/music-lists/500-greatest-songs-of-all-time-151127/the-clash-london-calling-3-66001/, April 7, 2011

[2] Financial Peace University workbook, Jack & Blake, pages 62 & 63

[3] DFA 2020 Matrix Book

[4] YCharts

What Is a Stock Split?

Tesla and Apple are splitting their shares, sending their stock prices higher. Wall Street, Twitter, and CNBC spent the last week or so commenting on the benefits of a split. What does it mean when a company decides to split its stock? Nothing.

What is a stock split? Let’s say you own 100 shares of a $100 stock valued at $10,000. If the company issues a two for one stock split (2:1), you will own 200 shares at $50 with a value of $10,000 once the split is complete. In this case, your shares doubled, and the price cut in half.

Tesla is issuing a five for one split, so for every share you own, you’ll own five afterwords. Tesla closed at $1,650 per share on Friday. If the split occurred today, the price would be $330. Since the announcement on August 11, the shares have soared more than 19% – in four days!

TSLA_chart (1)

Apple announced a four for one  (4:1) split, so for every share you own, you will hold four when completed. It is up more than 8% since the announcement. Apple last split its stock seven for one in 2014. If you purchased 100 shares on June 1, 2014, you would own 2,800 shares once they complete the recently announced split. Apple has split its shares five times.

AAPL_chart

Stocks splits used to be the norm. When a company reached a specific price, it would split its shares. For most companies, the magic price was $100. McDonald’s has split their shares eight times since the 1970s, while Coca-Cola has issued six, and Pepsi has done it five times.

What if a company doesn’t split its shares? Berkshire Hathaway trades for $316,251 because they have never issued a split. If Berkshire split its stock as often as Apple, the share price would be $1,411 – less than the price of Tesla and Amazon. If Apple never split its stock, it would trade for approximately $103,000 per share.

BRK.A_chart

When I lived in Connecticut, I chopped wood in the summer for our winter fires. After I cut a large piece of wood in two, I still had the same amount but in two smaller chunks.  I worked at a deli while in college. If someone ordered a sandwich, I cut it in two – same sandwich, two halves. When my family orders a dessert, we cut it into thirds – the same amount, three pieces.

Stock splits are exciting, but they do not add or subtract from the value of the company. One of the best ways to benefit from a stock split is to buy a great company and hold it forever.

You better cut the pizza in four pieces because I’m not hungry enough to eat six. ~ Yogi Berra

August 15, 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.