Cut In Half

Please do me a favor. Add up all your financial assets – retirement accounts, investment accounts, checking, savings, etc. After calculating your asset amount, divide it in half. How do you feel? Could you survive financially? Do you need to adjust your lifestyle? The answer to your question will determine how to pursue your future investment strategy.

Since 1930, the Dow Jones Industrial Average has lost half its value on a few occasions, like the Great Depression and the Great Recession. It has declined more than 30% many times, and it appears like it falls at least 10% annually. The average decline since 1930 has been approximately 18.5%, and this year the Dow has dropped 12.5%. Despite the downdrafts, the market has averaged 10% per year since 1926. Unfortunately, we must endure painful down days to reap the rewards from the long-term trend in the stock market.

One client recently said, “If you know the market will drop, why the ***k do we own stocks?” It’s a fair question despite the added color. We don’t know why or when stocks will recover, but they always have, and if you don’t own stocks when they rebound, you’ll miss significant returns. After the Dow Jones fell 31% in March 2020 due to COVID, the market soared 55% from March to September. If you panicked and sold, you missed a robust recovery. During the Great Recession, the Dow crashed 53%. If you sold during the onslaught, you missed a 150% return from 2009 to 2013. I’ve noticed that people who sell stocks when they fall rarely repurchase them when they start to recover.

Let’s revisit my original question. How would you feel if you lost half your assets? Of course, you’re upset, and you’re probably sick to your stomach because no one likes to lose money. However, if a 50% reduction in your assets does not impact your life, a market correction is a mere inconvenience and a buying opportunity.

If the market falls by half and significantly impacts your life, consider changing your investment allocation. Here are a few suggestions:

  1. Reduce your stock allocation. If a market correction alters your lifestyle, reduce your stock exposure to lower your risk level. Less risk equates to less return and less volatility.
  2. Buy bonds. Individual bonds are safe and predictable, especially US Treasuries, and they have performed well in previous corrections. During the 2008 correction, long-term US Treasuries climbed 26%. When stocks fell 43% from 2000 to 2003, bonds soared 43%.
  3. Increase cash. An emergency fund provides liquidity during a market collapse. If you can access some money during a crisis, it will allow your stocks time to recover.
  4. Reduce spending. If you reduce your spending, then you need fewer assets to live.

The Dow Jones is up 54% over the past five years, and if you’ve been a long-term investor, you’re still making money, but this brings little comfort to new investors or those who bought stocks a few months ago. I know it’s a challenging environment, but markets have always recovered. In the meantime, review your asset allocation, expenses, investments, fees, and goals.

If you think of the stock market as a cauldron of minestrone soup that occasionally somebody sticks a ladle in and stirs up, it takes a while before all the vegetables float back to the level that they were at before. ~ Seth Klarman

May 18, 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 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.

5 Things Worse Than A Stock Market Crash

Stocks are tumbling, led by the Nasdaq. The tech-heavy index is down more than 25 percent this year. Numerous stocks have fallen more than 50 percent as investors sell speculative growth stocks, including Peleton, Teledoc, Palantir, Roblox, Redfin, Shopify, and Coinbase. Giant companies like Amazon, Disney, and Facebook have dropped more than 30 percent. It’s an ugly market.

However, I’m not worried because the market has always recovered. The Nasdaq crashed in 2000, 2008, and 2020, and despite the corrections, it bounced back to all-time highs. I’m optimistic the Nasdaq will return to its winning ways.

Stock market corrections are terrifying, but here are five items that can permanently destroy your family’s financial future.

  1. No savings. Saving money is the ultimate way to create generational wealth. After you get paid, allocate money to your retirement account, savings account, and emergency fund. How much should you save? As much as you can! A recommended savings percentage is 10% of your income. Timing is also essential, and the sooner you start, the better. If you habitually save money, then market corrections become less of an issue because you built a margin of safety, allowing your stocks to rebound and recover. I’ve noticed individuals who do not save money panic and sell when their investments fall because they don’t have a margin of safety or financial cushion. I don’t know how much your account balance will be worth if you regularly save money, but I do know if you don’t save any, it will be worth zero.
  2. No emergency fund. An emergency fund is essential during uncertain times and extreme market volatility. Investors prefer not to allocate funds to cash when stocks are soaring because it’s an earnings drag, but when stocks crash, cash is king. An emergency fund allows you to meet your obligations as stocks fall. What is the recommended amount? An emergency fund covering nine to twelve months of expenses is suitable if you’re working. For example, if your monthly expenses are $10,000, an emergency fund of $90,000 to $120,000 is appropriate. If you’re considering retirement, plan to cover three years of expenses. If your annual expenses are $120,000, then prepare for a balance of $360,000. A three-year cash cushion will help if you retire during a stock market collapse.
  3. No will. Dying without a will or estate plan is unacceptable, especially if you’re married or have children. Don’t leave your estate distribution plan to a probate court or state-appointed attorney. If you have substantial assets, hire an estate planning attorney. A good estate planning attorney is expensive but cheaper than trying to settle your estate without the proper documentation.
  4. No life insurance. Providing for your loved ones is paramount. If you owe money to your bank, have young children, or a spouse, then providing for their needs after you’re gone is a must. A lack of insurance planning can leave your family desperate to make ends meet. Spending a few dollars on insurance premiums can eliminate a lifetime of worry for your heirs.
  5. No financial plan. A financial plan quantifies your hopes and dreams and addresses the first four issues in this blog. During challenging markets, a financial plan brings financial peace. One of the first things we check when conducting financial reviews for our clients is the financial plan, and it gives us the confidence to make sound recommendations void of emotions or opinions. Most financial planning software accounts for wide market swings, so a significant market correction will not derail the majority of plans, which is the case for our clients.

Market corrections are painful, disruptive, and untimely but temporary. If you don’t save money, have a will, or own life insurance, you can permanently damage your family’s financial future.

The time to repair the roof is when the sun is shining. ~ John F. Kennedy

May 16, 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 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.

Buy Bonds?

Buying bonds is the ultimate contrarian play because everyone knows interest rates are rising, and when rates rise, bond prices fall. The yield on the 1-Year US Treasury increased 1,528% over the past year, while the yield on the 10-Year US Treasury “only” jumped 64%. All rates along the yield curve have increased substantially, and they will probably continue to rise.  

In 1990, long-term interest rates reached 9%, and I could not give bonds away since investors were convinced rates were going higher because, in the 1980s, they touched 15%. However, rates declined from 1990 to 2020, falling to a low of  .62% – a drop of 93%. The ultimate bull market in bonds occurred from 1982 to 2020.

A 30-year bond will fall 19% if interest rates rise from 2% to 3% – not a compelling argument to buy bonds. And the higher rates go, the lower prices will fall. We sold most of our long-term bond holdings in March 2020 as yields pushed below 1%, and we shortened our maturities to about two to three years and realized gains while transitioning to a defensive position. As interest rates rise, we will extend the maturities of our bond holdings to capture higher yields.

If rates rise, is there a bond strategy that makes sense? I believe there is, and it’s called a bond ladder. A bond ladder works in a rising or falling interest rate environment, and as rates rise, a bond ladder allows you to generate more income.

Here is how it works. You purchase a three-year bond ladder with bonds maturing in one, two, and three years and they pay 1%, 2%, and 3%, respectively.

  • Bond 2023 pays 1%
  • Bond 2024 pays 2%
  • Bond 2025 pays 3%
  • Average yield = 2%

When the 2023 bond matures, the remaining bonds are now one-year closer to maturity. You now purchase a new three-year bond maturing in 2026, paying 3% with the proceeds from the 2023 bond. Your new ladder now looks like this:

  • Bond 2024 pays 2%
  • Bond 2025 pays 3%
  • Bond 2026 pays 3%
  • Average yield = 2.6%

Your income increased from 2% to 2.6% or 30%.

When the 2024 bond matures, the remaining bonds are now one-year closer to maturity. With the proceeds from the 2024 bond, you buy a 2027 bond, paying 3%. Your new ladder now looks like this:

  • Bond 2025 = 3%
  • Bond 2026 = 3%
  • Bond 2027 = 3%
  • Average yield = 3%

Your income increased by 15%.

Your bond ladder can consist of any maturity from one to thirty years, depending on your appetite for risk. Eventually, your ladder will contain higher-yielding long-term bonds with monthly, quarterly, or annual liquidity.

A physical ladder will take you higher with each rung you climb, and a bond ladder can produce higher income as you purchase new bonds. In addition to higher yields, buying bonds can protect your principal if stocks fall, especially if you own short-term bonds. For example, the NASDAQ is down 9.3% this year, while short-term Treasuries are only down 1.57%.

If interest rates continue to rise, you will have the opportunity to buy bonds at a discount, increasing your total return. For example, if you buy a 10-year bond with a 2% coupon at $100, your current income and yield-to-maturity will be 2%. If rates rise by 2%, the price could fall to $84. If you purchase the bond at $84, your current yield jumps to 2.4%, and the yield-to-maturity increases to 3.9%. It pays to buy bonds at a discount. One person’s trash is another person’s treasure.

What is the top for inflation and interest rates? I don’t have a clue, nor does the Federal Reserve. No one can predict where inflation or interest rates are going. If interest rates continue to rise, consider adding bonds to your portfolio so you can generate more income.

As I mentioned, buying bonds is the ultimate contrarian play because everyone knows interest rates are going higher, but what if everyone is wrong? What if rates don’t rise? What if inflation falls? If you buy when others are selling, you could make money with your shrewd investing skills. Who knows?

Bye, bye and buy bonds.

Bond selection is primarily a negative art. It is a process of exclusion and rejection, rather than of search and acceptance. ~ Benjamin Graham

February 11, 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 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.

Volatility Is a Two-Way Street

Volatility is a two-way street – rising and falling unexpectedly. Most investors equate volatility with risk, but it’s not. Stocks are volatile, explosive, and unpredictable whether they rise or fall. Over my thirty-year career, I have never received a call from a client concerned about a rising stock market. If stocks are up 300 points, no one calls to ask what’s wrong? Why are stocks up? Investors love volatility when stocks rise, not when they fall. Like a roller coaster, riders only scream on the way down.

Stocks rise more than they fall, so investors feel entitled to positive returns, but something must be wrong when they drop. Since 2012, the S&P 500 has risen 80% of the time, generating an average annual gain of 14.8%, but they have been volatile. The average standard deviation over the past decade has been 20.5%. What does this mean? If the expected return is 10%, stocks could rise 30.5% or fall 10.5%.[1]

Bonds, on the other hand, are less volatile than stocks. The annualized standard deviation for the Vanguard Total Bond ETF (BND) has been 3.52%, while the Goldman Sachs Treasury ETF (GBIL) averaged .29%.[2]

You need to own stocks to grow your wealth, despite the volatility. Stocks are more volatile than bonds, but they provide generous returns. Over the past ten years, the S&P 500 returned 240%, bonds fell 2%, and short-term Treasuries rose slightly, barely breaking even. If you don’t like wild gyrations in stock prices, buy T-Bills. T-Bills are considered the most secure asset in the world. If you allocate money to this asset class, expect low volatility and low returns.

No one likes to lose money, but if you own stocks, you will experience losses at some point. The losses could last days, weeks, months, or years. One of the best ways to protect your assets is to diversify your holdings across stocks, bonds, and cash. For example, the NASDAQ index is down 9.5% for the past three months, whereas a portfolio of 60% stocks and 40% bonds is only down 3.6%.[3]

Time heals all wounds, and markets ultimately recover. Will this time be different? I doubt it. Be patient, focus on your goals, follow your plan, think long-term and good things will happen.

The true investor welcomes volatility – a wild fluctuating market means that irrationally low prices will periodically be attached to solid businesses. ~ Warren Buffett

February 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 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] YCHARTS

[2] Riskalyze

[3] The 60/40 inculdes iShares Core S&P 500 ETF (IVV) and iShares Core US Aggregate Bond ETF (AGG)

Traffic Jams and Investing

Have you ever been in a traffic jam? If you have driven on the 5, 10, 15, 405, 101, 110, 40, 70, 35, 91, or 95, you will get stuck in a traffic jam. I put the odds at 100%. Did you ever contemplate walking, thinking it would be faster? Maybe if you only had to walk a few blocks but certainly not if you were driving a long distance.   

The drive from Austin to Dallas on I-35 takes about 3 hours and 30 minutes, and there are more than a few opportunities to get stuck in traffic. However, I never contemplated walking to Dallas from Austin because it would take about two and a half days. I’m not too fond of traffic jams, but they’re part of driving.

In the early 1970s, my mom, sister, and I visited my cousins in Laguna Beach. After dinner, we left for our home near Los Angeles, and we got trapped in a massive traffic jam. I was young, and I didn’t handle it well. I felt like the world was ending, and I would never see my friends again. My fears were unfounded as the traffic started flowing, and we made it home without incident. As a native Californian, it would not be my last traffic jam.

What does a traffic jam have to do with investing? When stocks are falling, investors want to jump ship, sell their investments, and wait for the market to recover. Nervous investors desire to time the market, hoping to buy stocks before they soar and sell before a crash. Good luck.

According to AMG, If you invested $1 million in the S&P 500 in 1999, it was worth $5.9 million in 2021 – an annual return of 8.4%. However, if you missed the ten best days, your value dropped to $2.7 million. It gets worse. If you miss the twenty-five best days, your account balance was only worth $1.29 million – an annual return of 1.1%.[1] As a comparison, US T-Bills returned 1.7%. It does not pay to time the market.

Urban traffic congestion sign saying Expect Delays

Today, you have access to several tools to help you drive safely. With GPS, it’s easy to navigate the nation’s highways, avoid traffic jams, and rarely get lost. Like a GPS for your car, a financial plan can guide you through challenging market conditions, allowing you to focus on your long-term investment goals.

They say the universe is expanding. That should help with the traffic. ~ Steven Wright

February 8, 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 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] file:///C:/Users/parro/Downloads/Keep%20Calm%20and%20Remain%20Diversified%20Brochure%20(1).PDF

My Emotional Rescue    

Stocks are off to a rough start. The NASDAQ is down 10%, and several companies have fallen significantly, including Facebook, Spotify, PayPal, and Etsy. It’s a brutal tape.

1990 was my first full year in the investment business, and the S&P 500 lost 6.5%. I thought my career was over because a few friends and family trusted me with their money, and I let them down. I felt horrible, but the market recovered, and by 1993 the index was up 32%.

In 1994, the Federal Reserve raised interest rates from 3.25% to 5.5%, and everything fell. Though the S&P 500 only dropped 1.5%, it felt like a major correction. However, the S&P 500 recovered, and from 1995 to 1999, the index soared 220%.

The Tech Wreck crushed the market from 2000 to 2002 as the S&P 500 fell 40%. It was my first full-blown bear market. The dot.com era ended with a bang as valuations soared to unattainable levels. It was a long two years, but, once again, the index bounced back and climbed 67% from 2003 to 2007

The next blow occurred during the Great Recession, where the S&P 500 declined 49% as investors reacted to extreme levels of mortgage debt and a few high-profile investment firms that collapsed. After the crash, the market rebounded with authority and jumped 224% from 2009 until October 2018 before it fell 14% a couple of months later. The index did rally again and rose 29% from 2019 to February 2020.

COVID-19 ended the bull run with a thud as the S&P 500 fell 34% in March 2020. The decline is still fresh in many minds, mine included. But, from the March 2020 low, the index ripped higher and climbed 93%.

Here we are again, and the market is falling, worried about Russia, inflation, the Federal Reserve, and rising interest rates. Will it recover? I believe it will, but it could take time.

Emotionally, stock corrections are unsettling, and no one likes to lose money. I get it. I have enough data to choke a horse and can access hundreds of years of information for stocks, bonds, interest rates, inflation, etc. But facts don’t matter when stocks are falling – emotions surpass facts as fear rises. I could show you reports where stocks averaged a 10% return since 1926 and made money 75% of the time. I have additional reports showing stocks outperforming bonds by a ratio of 53 to 1. And more data showing US T-Bills have never lost money and averaged 3% per year, but so has inflation, so your net return has been zero![1]

Peter Lynch said, “Everyone has the brainpower to make money in stocks. Not everyone has the stomach.” Corrections are gutwrenching, especially as you watch your assets erode. According to AMG, the average bear-market decline has been 39%, lasts about 1.3 years, and occurs every 7.7 years. Also, time wins. The S&P 500 has never lost money over 20-year rolling periods.[2]

Here are a few ideas to help you if the stock market keeps you down.

  • Review your time horizon. If you don’t need money for five years or more, stay invested in stocks. However, if you need your money in the near term, invest in cash or short-term bonds that won’t lose money during a stock market correction.
  • Diversify your holdings. If you only own US large-cap stocks, consider adding small-cap and international stocks. Also, add bonds, real estate, or other asset classes to reduce your risk level.
  • Reduce your stock allocation. If your stocks keep you up at night, lower your allocation to your sleeping level.
  • Don’t panic. Stocks recover. Recoveries may take weeks, months, or years, but they’ve always rebounded. Will this time be different? I don’t know, but I like my odds if history is my guide.
  • Rebalance your accounts. As stocks bounce up and down, your asset allocation is likely off-kilter. If so, rebalance your account, so your risk level and allocation remain intact.
  • Follow your plan. A financial plan will help you during the down days. If you don’t have a plan, it’s like flying a plane without a GPS.

I know market corrections are difficult; I’ve seen too many, but I believe in the long-term trend of the American economy and the stock market.

Follow your plan, focus on your goals, diversify your assets, rebalance often, think long-term, and good things will happen.

Is there nothing I can say, nothing I can do to change your mind? ~ Rolling Stones

February 3, 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 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] DFA 2021 Matrix Book

[2] Keep Calm and Remain Diversified – Principles of Investment Success 4Q 2021 AMG

Parrott Wealth Management Annual Letter

Parrott Wealth Management Annual Letter

Despite political turmoil, Delta, Omicron, rising interest rates, increasing inflation, supply chain issues, and several corrections of 4% or more, the three major US indices produced significant gains last year, led by the S&P 500 as it climbed 27%. Stocks were resilient to the surprise of many astute market observers. Large companies like Microsoft, Alphabet, and Pfizer outperformed small-caps and international stocks by a wide margin. Bonds were negative as interest rates climbed, and most emerging markets fell because of exposure to Chinese securities. Here is a look at how various asset classes performed in 2021.

  • Real Estate = 36.59%
  • Small-Cap Stocks = 24.60%
  • International Stocks = 7.84%
  • Emerging Markets = -1.30%
  • Bonds = -3.90%
  • Gold = -4.15%
  • Oil = 49.65%

Though US Stock market valuation metrics are rich and extended, the market can still trade higher. Relative to US companies, international stocks offer tremendous value.

Philosophy

The root of what we do is financial planning. A financial plan helps us manage your account better because it focuses on your hopes, dreams, and fears. It gives us the confidence to make recommendations that benefit you and your family.

We believe in the buy-and-hold strategy of investing. Meaning, we don’t make a lot of trades or changes to the portfolios, and we hold our investments through all types of market conditions – good, bad, and ugly because we have not found a better approach for investors to create generational wealth. Timing the market does not work, and it’s like teaching a pig to sing. It’s a waste of time, and it annoys the pig.

PWM Models

Our managed models performed well last year, producing gains except for our most conservative model, which is 100% bonds, and it dropped 1.29%. Our all-stock model climbed 24.26%. The models are diversified and built with funds managed primarily by Vanguard, Dimensional, and BlackRock and designed to take less risk than the market. For example, our all-stock model is approximately 20% less risky than the S&P 500.

China

We reduced our Chinese stock allocation significantly because of the actions of the Chinese government towards their publicly traded companies. At this point, we consider China uninvestable. We sold Vanguard’s Emerging Markets Fund ETF (VWO) and transferred the money to the iShares MSCI Emerging Markets ex-China ETF (EMXC). The ex-China fund closed the year up 6.6%, while Vanguard’s fund fell 1.3%. We will make a similar change with Dimensional’s Emerging Markets Fund.

Bonds

Bonds finished in negative territory as they reacted to rising interest rates and escalating inflation. When interest rates rise, bond prices fall. Our bond exposure remains short-term, with maturities ranging from a few months to a few years, and we will stay short-term until rates rise further. If rates do rise, the impact on our bond portfolios should be minor. We continue to buy bonds for safety and diversification because stocks will fall eventually, and bonds will perform well when they do. Bonds are negatively correlated to stocks and still provide one of the best hedges for tumbling stock prices. We also are buying bonds for accounts with large cash balances since money market rates are near zero; they are the lesser of two evils.

Bitcoin

I continue to swing and miss when it comes to Bitcoin. The popular cryptocurrency soared 57% last year despite a year-end sell-off. I’ve been wrong on cryptocurrencies forever, and this trend likely continues for the foreseeable future because I don’t understand it or have a clue about how it works. I don’t consider it a currency because it’s too volatile, so, by default, it’s an asset class like gold or silver. Crypto experts love Bitcoin because it’s not correlated to stocks, and it’s an inflation hedge. However, lately, it rises when stocks rise and falls when stocks fall, meaning it’s correlated to stocks. And since inflation has surged, Bitcoin has dropped. Also, Bitcoin and other cryptocurrencies are only fourteen years old, and the last time we experienced significant inflation was more than forty years ago. Hence, it’s too early to tell how it performs in an inflationary environment. According to crypto.com there are 10,586 coins, including Polkadot, Tron, and SafeMoon. As a comparison, there are currently 10,342 US publicly traded securities. And there’s nothing to stop you, me, or my dog Cricket from launching a new crypto coin, so how do you pick the best one? I’m not sure it’s possible. Historically, wealth created from nothing does not last.

Working From Home Stocks

Last year was a boon for working from home (WFH) stocks, but not this year. As the economy reopened, companies like Peleton, Zoom, Docusign, Stitch Fix, and others fell back to earth. I wrote in last year’s letter that “at some point, valuations will matter, and investors will focus on earnings, revenue, cash flow, and profits; until then, tread lightly and be careful with these high-flying investments.” This year, DocuSign dropped 31%, Zoom fell 45%, Stitch Fix declined 67%, and Peloton crashed 76%. I’m sure a few WFH stocks recover, but they’re still expensive, so my advice from last year still stands.

Deficits and Debt

I must balance my budget because I will eventually lose my business and home if I don’t. The federal government, however, does not. Our government can print money and run a deficit forever, and it mostly has. Public, searchable records date to 1901, and the first deficit occurred in 1904 at $43 million, equivalent to $1.4 trillion today.[1] And since 1904, our government has run a deficit 76% of the time. In 1943, the budget deficit accounted for 27% of GDP; today, it’s 15%.[2] The budget deficit fell below $100 billion for the first time in 1982.

Our government’s last surplus was in 2000, before the Tech Wreck, where stocks fell 43%, and our country entered a deep recession. Before 2000, the previous surplus year was 1960.

Our current deficit is $3.12 trillion as our government sent stimulus checks to people in need and offered airlines resources to keep flying. During the Great Recession from 2007 to 2009, the budget deficit touched a low of $1.5 trillion when the government bailed out auto manufacturers, banks, and insurance companies; as the economy recovered, the deficit improved to a negative balance of $469 billion by 2015.

During times of economic pressure like wars, recessions, or pandemics, our country comes to the rescue and, as a result, runs a deficit. When the economy thrives, the government reduces or eliminates its debts. For example, in 1943, the budget deficit was a negative $55.5 billion as it financed WWII. By 1949, after the war and the troops returned home, the government produced a surplus of $10.5 billion.

What does this mean for the stock market? Not much. Since 1915, the Dow Jones has risen more than 48,000 percent. Deficits look scary, but they don’t have much of an impact on stocks.

PWM Growth Indicators

Our “Starbucks card indicator” continues to percolate, showing signs of significant growth. This year we mailed 145 cards to our clients, up 20% from last year and more than 150% since we started doing it in 2017. If we examine traditional growth metrics like assets and revenues, PWM grew 36% last year, and our average annual growth rate for the past six years has been 41%.

Janet

Janet, our Director of Client Services, is celebrating her fifth anniversary with Parrott Wealth. She joined the firm on January 2, 2017. Janet is a tremendous asset to the firm and continues to make our back-office hum without issues. I’m encouraged because most of you bypass me altogether and contact Janet directly for assistance with your accounts. She was valuable last year as we transitioned from state to federal regulation.

Spencer

Our headcount grew by one last year as Spencer Engelke joined PWM. Spencer has been an outstanding hire, and he is currently working on obtaining the Certified Financial Planners designation and has already passed module one. Spencer’s primary focus is on financial planning but occasionally assists me with trading.

SOAR Wealth Management

We launched SOAR Wealth Management in 2021 to help new, first-time, or emerging investors. Betterment manages the investment portfolios while we assist them with budgeting, debt management, and financial planning. The website is http://www.soarwm.com.

2022 Predictions

Last year, most of my predictions came true, so the pressure is on to replicate my success. If you want to review the previous year’s results, email me at bill@parrottwealth, and I will forward you a copy. Here are my thoughts for 2022.

  1. The S&P 500 will rise 10%. It’s not much of a prediction since the popular index has averaged 10.1% for the past 95 years.
  2. If the Federal Reserve raises interest rates, they will do so only once or twice.
  3. The rate of inflation will fall. It’s currently 6.81%, and I believe it drops below 4%.
  4. Housing remains robust as apartment dwellers and millennials continue to buy new homes. The prices of vacation homes remain elevated as cash-rich investors diversify their assets beyond stocks and bonds.
  5. President Biden passes a watered-downed version of the infrastructure bill.
  6. China continues to crack down on publicly traded companies, billionaires, and Taiwan, further depressing its stock prices.
  7. The House and Senate flip to the GOP in the November elections.
  8. COVID is here to stay, requiring an annual booster similar to a flu shot.
  9. The Great Resignation continues as workers retire early because of COVID and stressful work environments. Individuals will leave the workforce to pursue their hobbies.
  10. Travel surges next year as people leave their COVID caves. Attendance at National Parks soars as people prefer to drive rather than fly.

Thank You

We appreciate you and your business. We know you have numerous firms to help you reach your goals, and we’re thankful for the trust you placed in Parrott Wealth Management. We are blessed beyond measure.

As our firm grows, we’re honored to work with second and third-generation clients. Last year, we opened several accounts for college students and recent graduates referred to us by their parents or grandparents. We are excited to help these youthful investors build solid investment foundations.

2022

May the new year bring you peace, prosperity, health, happiness, and rest. My prayer is that this year will be your best!

Now may the Lord of peace himself give you his peace at all times and in every situation. The Lord be with you all. ~ 2 Thessalonians 3:16

Sincerely,

Bill Parrott

President and CEO

Austin, TX

January 3, 2022


[1] YCHARTS US Government on-budget surplus or deficit – 1901 to 2020.

[2] FRED Economic Data – Federal surplus or deficit as a percent of GDP – 1930 – 2021.

Should You Pay off Your Mortgage?

Interest rates are near historical lows, so does it make sense to pay off your mortgage? Eliminating debt is satisfying, but should you sell stocks or bonds to make it happen? Let’s explore a few options.

Pay off your mortgage

  1. If your cash balance at your bank is high, it’s wise to pay off your mortgage because cash earns nothing. Current mortgage rates are 3.11%, significantly higher than the 0% you’re making from your bank.
  2. Do you plan to retire in the next few years? If so, eliminate your mortgage. Housing is a considerable expense for retirees, even if you’re debt-free. Property taxes, upkeep, and maintenance are not cheap, so removing one more payment is prudent.
  3. Can you commit to investing monthly for twenty or thirty years? If so, pay off your mortgage. The monthly payment for a $500,000 home is approximately $1,700. Investing $1,700 per month for thirty years could grow to more than $3.8 million.
  4. If it brings you peace and reduces your stress, pay it off regardless of the math.

Do not pay off your mortgage.

  1. Do not pay off your mortgage If you expect inflation to rise. In fact, I would recommend borrowing more money because rates are low, but they will increase as inflation climbs.
  2. If your investments earn more than 5% per year, paying off your mortgage does not make sense. Your gross return could drop by 1% to 2% per year, depending on your tax bracket. For example, if you’re in the 32% tax bracket and earn 5%, your after-tax return could fall to 3.4%. When calculating your return, include all your taxable assets, including stocks, bonds, and cash. Do not cherry-pick your best investments.
  3. If you expect to move in the next few years, do not pay off your mortgage. Instead, keep your investments as a safety net or apply them to your new home.

The stock market has soared the past ten years, so letting your investments grow is smart. However, there have been several periods where stocks have not performed well, like 2000 to 2013, where the S&P 500 fell about 3%. We are not promised tomorrow, and returns are fleeting, but expenses are forever.

“Creditors have better memories than debtors.” ~ Benjamin Franklin

January 10, 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 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 A Corporate Trustee?

Family dynamics are fascinating. After more than thirty years in the investment management and financial planning industry, I’ve noticed most families are similar. There are patriarchs, matriarchs, do-gooders, black sheep, brilliant minds, athletes, know-it-alls, Republicans, Democrats, meat-eaters, vegetarians, rich, poor, entitled children, lost souls, and courageous explorers. If you think yours is different, take a long look at your family tree or discuss a hot topic like politics, Bitcoin, or COVID at your next family gathering.

Because of COVID, several clients asked me about naming a successor trustee for their family trust. In some cases, it’s an easy decision, but at other times it’s not. Should you list a child, and if you have multiple children, which one? If you don’t have children, do you add a cousin, a sibling, or a brother-in-law?

After decades of wealth creation, naming a successor trustee to honor your wishes should not be taken lightly, and it’s a critical decision. Will your child have the capacity to manage your estate? Will a third cousin invest your assets wisely? Who knows. And, once you’re gone, there is nothing you can do about it. Rather than naming a family member, is there a better option?

A corporate trustee could benefit all parties because they’re not emotionally attached to your family, and it’s pure business. In addition, to honoring your wishes, they’ll distribute funds to your loved ones, charities, and others you support. They’ll file trust tax returns, and, more importantly, they are perpetual. Unlike your successor trustee, they won’t die. Your child could benefit from a corporate trustee as well. The burden of managing and distributing an estate is stressful, time-consuming, and complicated. It took my mom years to settle her parent’s estate. A corporation with several attorneys, tax experts, and advisors may have been a better option for my grandparents, though my mom did an excellent job.

Corporate trustees manage several trusts, including living trusts, life insurance trusts, charitable remainder trusts, and generation-skipping trusts. In addition, they can invest your assets professionally to grow them for future generations. Of course, a corporate trustee is not free, and your estate must pay a fee for their services, but it could be money well spent if it brings you peace knowing they are honoring your wishes.

Here is a list of corporate trustees.

Schwab Personal Trust Services:

https://www.schwab.com/personal-trust-services#beacon-deck–86741

Fidelity Personal Trust Services:

https://www.fidelity.com/managed-accounts/portfolio-advisory-service/personal-trust-services

Vanguard Personal Trust Services:

https://investor.vanguard.com/advice/trust-services

The strength of a family, like the strength of an army, is in its loyalty to each other. ~ Mario Puzo

January 8, 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 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 Year in Pictures

I loved reading the Year in Sports by Sports Illustrated as a kid. It was a collection of their best pictures from the previous year and required reading for my cohort of friends. So here is a look at how markets, investments, and economic indicators performed last year.

The S&P 500, Dow Jones, and NASDAQ performed well last year.

Though stocks performed well, they fell several times last year.

The bond market struggled last year as interest rates and inflation climbed.

Working from home stocks got crushed as investors focused on earnings, profits, and cash flows.

Bitcoin had another excellent year but sold off significantly in November and December.

Gold finished in negative territory despite rising inflation.

Inflation jumped last year, finishing the year at 6.81%.

Growth beat value again despite a robust first-half surge from value companies.

GDP posted a solid gain.

Household debt continues to climb.

International investments lagged US stocks.

Large-caps outperformed small caps, which beat mid-caps.

Interest rates rose significantly last year.

Real estate markets turned in another stellar year.

Unemployment rates dropped last year.

I wish you and your family a Happy New Year. Follow your plan, diversify your assets, save your money, invest often, rebalance your accounts, think long term, and good things will happen.

A picture is worth a thousand words. ~ Albert Einstein

January 7, 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 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.