A 1% World

Interest rates continue to fall. U.S. Treasury investments with maturities from one month to thirty years are now yielding below 2% as investors pursue safety. The Coronavirus is generating global economic uncertainty, and our government bonds are benefiting.

The ability to generate current income from bonds is challenging. In year’s past, you could rely on a steady stream of income from bonds to meet your needs. Bond interest, plus Social Security were usually enough for individuals to enjoy a comfortable retirement. In 1990, the yield on the 30-Year U.S. Treasury bond was 8%. If you needed $100,000 in income, you purchased $1.25 million worth of bonds. Today, you need $5.26 million, or four times as much. If rates drop to 1%, you’ll need $10 million to receive $100,000 in income!

With Interest rates at historic lows, where can you find income? Here are a few strategies you can employ today.

Dividend-Paying Stocks. Currently, 2,304 stocks are yielding more than a 30-year U.S. Treasury bond at 1.9%.[1] Johnson & Johnson, Intel, Coca-Cola, The Home Depot, Merck, McDonald’s, Pepsi, Lockheed Martin, Qualcomm, Target, Walgreens, and Clorox are some names on this list. Who knows what interest rates and the stock market will do over the next few days, but I’m confident the prices for most of these names will be higher in 30 years.

Systematic Withdrawal Plan: If you own mutual funds, a systematic withdrawal plan (SWP) allows you to generate monthly, quarterly, or annual income from your existing holdings. For example, if you invested $100,000 in the Vanguard S&P 500 Index Fund (VFINX) in 1980, 40 years ago, and withdrew 4% of the account balance each year, you received over $1 million in payments, and your account balance is now worth more than $1.5 million! In 1980, the income generated from this strategy was $4,000; this year, it will produce $62,956, an increase of 1,473%.[2]

Option Writing.  Writing options or selling calls on stocks you own is a great way to produce more income. Let’s say you own 1,000 shares of ABC company trading for $37 per share. If you want to sell your shares at $40, you can use a covered call strategy. A hypothetical option expiring in April may cost $1. You can write ten call contracts on your ABC holding because one contract equals 100 shares of stock. One thousand shares, or ten contracts, at $1 will generate $1,000 before fees and commissions. The $1,000 will credit your account when the trade is complete.  If ABC stock closes at $40 or higher on the April expiration, you must sell your stock at $40 regardless of how high it trades above your strike price. If ABC stock closes below $40 at expiration, you keep your shares, and you can write another ten contracts for May or June.[3]

Fixed Annuity. Normally, I’m not a fan of annuities, but desperate times call for drastic measures. A fixed annuity allows you to receive monthly income for a certain period, or the rest of your life. The annuity will enable you to receive the income generated from the investments, similar to a bond, or you can annuitize your investment and receive a guaranteed payout for life.  When you annuitize, you won’t be able to make any changes to your income stream. However, it will help you avoid longevity risk or the risk of outliving your money. An annuity is an insurance product, so your fees will be higher than most other products.

It’s tempting to chase rates, but do not be lured into a product offering an extremely high level of interest. A high yield may signal trouble with the underlying investment. Instead, as you hunt for yield, look for an investment that produces a consistent stream of income without taking on too much risk.

If you don’t find a way to make money while you sleep, you will work until you die. ~ Warren Buffett

February 24, 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] YCharts

[2] Morningstar Office Hypothetical Tool, 01/01/1980 to 1/31/2020.  Your rate of return may vary and your results may differ. The hypothetical does not include fees or taxes which will adjust the results.

[3] Options involve risk and are not suitable for every investor.

A Billion Dollars A Year

How would you spend a billion dollars? Would you create a foundation? Would you run for President? Would you try to send a rocket to Mars? Would you purchase priceless art?

The top five hedge fund managers last year earned more than a billion dollars in salary, with an average pay of $1.48 billion. A group of fifteen hedge fund managers made more than $12 billion.[1] Hedge fund managers typically charge a 2% fee on your investment and take 20% of your profits as compensation. The S&P 500 rose 29% last year, without fees. If you invested $10,000,000 in a hedge fund and your account appreciated 29%, your manager’s compensation would have been approximately $780,000, or 7.8% of your original investment.

Last year was a phenomenal year for major asset classes, so your hedge fund manager should be compensated well for his (the top five hedge fund managers are all men) efforts. How did they perform? The five hedge fund managers, as a group, generated an average return of 24.6%, before fees.  The best of this elite group returned 41%, the worst returned 14%.[2]

On a gross basis, the top five underperformed the S&P 500 by 4.4%. Two of the five outperformed the index, and only one bettered it on a net basis. If the average return was 24.6% and their fee was 7.8%, then the net gain was 16.8%. Last year, several low-cost ETFs performed well: Real Estate returned 24.4%, Utilities 21.3%, Small Caps 21%, International Stocks 18.1%, Gold 17.9%, and Emerging Markets 16.7%.[3] An equal weighting of these ETF’s returned 19.9%.

Fees matter when it comes to investing because you can only spend net returns. How do you know what fees you’re paying? Here are a few suggestions.

  • Every publicly traded investment has a ticker symbol, and if you plug it into Yahoo! Finance, Morningstar, or any other financial site, you’ll be able to see the fees associated with your investment. Every Mutual Fund and Exchange Traded Fund has an operating expense ratio (OER). For example, the OER for Vanguard’s S&P 500 Index Fund (VOO) is .03% or $3 per $10,000 invested.
  • Registered Investment Advisors must file their Form ADV each year. The ADV outlines an advisor’s fee schedule, assets under management, and other vital information. If you work with an advisor, they’ll provide you with their form.
  • Broker sold insurance items, and other packaged products are delivered with a prospectus. The prospectus summarizes the fee schedule, including sales charges, surrender fees, 12b-1 fees, and additional fees.
  • Brokerage firms post their commission rates and schedule online.
  • Conduct a fee audit with your advisor. Your advisor should be able to review your investment holdings, account fees, and other charges to help you get a better handle on your costs.

Registered Investment Advisors must disclose their fees to you before you invest, brokers should do the same. If you’re not sure what fees you’re paying, ask. It’s your money. I’ve noticed firms that charge high fees say they’re adding value to their clients. If you’re working with one of these firms, ask them how they’re adding value. If they can’t explain it to you, maybe it’s time to hire a new advisor.

One of the best ways to add value to your bottom line is to work with a Certified Financial Planner™ who invests your money in a globally diversified portfolio of low-cost funds and offers financial planning.

Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor. ~ Romans 13:7

February 17, 2020.

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

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

[1] https://markets.businessinsider.com/news/stocks/hedge-fund-managers-earned-more-than-billion-last-year-highest-2020-2-1028894639, by Ben Wick, February 11, 2020

[2] Ibid

[3] YCharts: VNQ, VPU, IJR, EFA, GLD, & VWO 2019.

China and Emerging Markets

China is closed. The world’s second-largest economy is shut down due to the Coronavirus, and life is at a standstill. According to several news reports, the number of deaths from the virus has now surpassed the number of deaths from SARS – a frightening thought, and the uncertainty is making the situation worse.

China’s idleness will have, at some point, an impact on global economies and stock markets. The Chinese stock market is down .5% for the year, but this can change quickly.

Emerging markets and China are linked. Chinese stocks are 33% of the MSCI Emerging Market Index, so when China moves, so does the index. The index invests across five regions, 26 countries, and 1,100 securities.[1] Dimensional Funds, Fidelity, and Oppenheimer manage sizeable emerging market mutual funds, while Vanguard, Blackrock, and Schwab have substantial assets in their exchange-traded funds. The top holdings for most of these funds include Alibaba, Tencent, Taiwan Semiconductor, and PingAn Insurance Group.

The Matthews China Investor Fund (MCHFX) has produced an average annual return of 11.51% for the past twenty years, and it has a current asset allocation of 95% stocks, 5% cash. Most of their assets, 89%, are invested in Asian emerging markets.

Chinese stocks account for 3% of the global equity market capitalization, the same level as France and Canada.[2]  We recommend an allocation of 5% to emerging markets, so if Chinese stocks account for 33% of the index, our exposure to China is 1.65%. If Chinese stocks fall, the index will too. However, I’m willing to commit 1.65% of capital to the world’s second-largest economy.

During the AIDS epidemic from 1987 to 1995, the emerging markets index fell 6.7%, Chinese stocks dropped 40%, and the S&P 500 rose 34.9%.

Emerging markets rose 13.8% during the Bird Flu outbreak from 1997 to 2004. Chinese stocks plunged 65.6%, the S&P 500 rose 63.6%.

The emerging markets index rose 122% during the SARS epidemic from 2002 to 2005, while Chinese stocks climbed 74%, and the S&P 500 index grew 8.7%.

During the Swine Flu outbreak from 2009 to 2010, emerging markets soared 103.1%, Chinese stocks increased by 62.5%, and the S&P 500 was up 39.2%.

The Ebola outbreak occurred from 2013 to 2016. During this outbreak, emerging markets fell by 18.2%, Chinese stocks dropped 6.8%, and the S&P 500 rose 57%.

The United States stock market is massive, efficient, and developed, but it’s not immune to extended periods of poor performance. During the ‘70s, a 10,000 investment grew to $11,570, generating an average annual return of 1.47%. If you invested $10,000 in the S&P 500 on January 1, 2000, you had to wait thirteen years before you were profitable. But, if you held on to your original $10,000 investment from 1970, it’s now worth $357,820, producing an average annual return of 7.35%.[3]  For the past two decades, the S&P 500 and MSCI Emerging Markets Index produced similar returns.

Emerging markets have always been volatile – a feast or famine mentality. In 2006, Chinese stocks rose 82.9%. in 2008, they fell by 50.8%. Turkey rose 253% in 1999, and fell 45.8% in 2000, 32.8% in 2001, and 35.8% in 2002.[4] Volatility is the central theme for investors in emerging markets.

Does it make sense to sell all your emerging market holdings? My recommendation is to stay committed to this sector. Another reason to remain long emerging markets is demographics. China, India, Indonesia, Pakistan, Brazil, Russia, and Mexico account for 49% of the world’s population – and growing![5]

Rather than selling your emerging market stocks, invest in a globally diversified portfolio of low-cost funds, investing in an assortment of stocks and bonds based on your financial goals and time horizon.

What should you do if emerging markets fall? Buy more!

Nevertheless, I will bring health and healing to it; I will heal my people and will let them enjoy abundant peace and security. ~ Jeremiah 33:6 

February 10, 2020.

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

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

 

 

 

[1] https://www.msci.com/emerging-markets

[2] Dimensional Fund Advisors 2019 Matrix Book

[3] YCharts.

[4] Dimensional Fund Advisors 2019 Matrix Book

[5] https://www.internetworldstats.com/stats8.htm

I Missed Tesla

Tesla’s stock performance has been electrifying, rising 20% yesterday, 15% today, and 86% for the year. Since June, it’s soared 415%. On August 7, 2018, Elon Musk tweeted, “Am considering taking Tesla private at $420. Funding secured.”[1] Tesla’s stock is up 142% from this now infamous tweet.

Initially, I missed several “obvious” winners over the past three decades, like Apple, Google, Microsoft, Amazon, and so on. I did, however, eventually buy these stocks. In 1993 I purchased DELL Computer in my IRA and quickly doubled my money. After it doubled, I sold it so I wouldn’t lose my profit. DELL would rise another 20,000% or so over the next several years, a valuable lesson to let your winners run.

I’m not worried I missed Tesla, because I own it indirectly through several funds. Who knows what’s ahead for Tesla, but if it follows the path of previous highfliers, I may get another opportunity to buy it at a lower price. When I started in the business as a stockbroker, I recommended Coca Cola stock to clients, despite the fact it went public in 1919, 71 years before I started. Coke stock has risen over 1,000% since January of 1990[2], so investors still made money despite its strong performance during the previous seven decades.

Missing a winning stock doesn’t cause me any regret because I’ve also passed on losers like Enron, Worldcom, Global Crossing, Gamestop, and several others. In a diversified portfolio of individual stocks, you’ll probably own a few winners, a few losers, and numerous also-rans. A winning stock like Amazon or Tesla can have a significant impact on your portfolio. A losing stock, likewise, will be an anchor, dragging your performance down.

Tesla is a popular stock, getting most of the headlines and screen time on CNBC, but other stocks are performing better this year. Nanoviricides is up 331%, LMP Automotive Holdings Inc is up 114%, and Interups is up 110%.[3] Owning mutual funds will give you exposure to companies not on your radar screen.

What should you do if you’ve missed a highflying stock that everybody else appears to own? Here are a few suggestions.

  • Be patient. What goes up will come down. Amazon stock fell 92% in 2001 and 60% in 2008. Apple fell 85% in 1985, 82% in 1997, 79% in 2003, and 56% in 2008. Facebook fell 54% in 2012 and 38% in 2018.[4] Stocks fluctuate and oscillate between over and undervalued.
  • Buy fewer shares. If your goal is to buy 100 shares, start with 50 or 25.
  • Buy a fixed dollar amount. Rather than focusing on shares, start with dollars. A prudent allocation is 3% to 5% of your account balance.
  • Set a limit. Enter a buy-limit to purchase the stock at a specific price. You can set any price you want, but you must buy the stock if it trades at or below your limit price; however, you’re not guaranteed to get the stock at the price you set.
  • Sell a put option. Selling a put option obligates you to buy shares at a specific price. Because you’re a seller, you’ll collect a premium. The premium is yours to keep, regardless of what happens to the price of the stock. For example, Tesla’s April 2020 $500 put option is currently selling for $6.75, meaning, for every contract you sell, you’ll collect $675, before fees. One option contract equals 100 shares of stock, so if you sold one contract at $500, you’re obligated to buy it at that price if the stock trades at or below the strike price when the contract expires in April – 100 shares of Tesla at $500 is a $50,000 purchase. If you’re going to pursue this strategy, please work with an advisor who understands option trading, because options involve risk, and they’re not suitable for every investor.
  • Buy a mutual fund. The following mutual funds own shares of Tesla: Baron Partners (BPTUX), Harbor Capital Appreciation (HRCAX), Vanguard Extended Market (VEXMX) and Invesco QQQ Trust (QQQ)

Chasing a high-flying stock is a risky proposition, so develop a trading plan and tread lightly. Don’t over commit capital and avoid leverage. Be patient, and work your plan.

“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.” ~ Peter Lynch

February 4, 2020.

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

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

 

 

 

 

 

 

 

[1] https://www.cnbc.com/2019/08/08/teslas-chaotic-year-after-musks-funding-secured-tweet.html, By Michael Wayland, August 8, 2019.

[2] YCharts: January 1, 1990 – February 3, 2020.

[3] YCharts

[4] Ibid

A Flight to Safety

This decade is off to a tough start. The Coronavirus is disrupting global trade, travel, markets, and economies. The 2020 U.S. Presidential election will also add to the uncertainty and confusion. With increasing risk, should you buy, sell, or hold your existing investments?

When forecasts are dire, and projections are bleak, selling your stock positions and moving to cash makes sense. It seems prudent to sell your investments and park the money in a bank until the storm passes, and, when it does, you can repurchase your stocks.

Let’s say, for fun, you invested $1 million in the S&P 500 in 2005 – 100% of your assets. After three years, your strategy paid off. Your account at the end of 2007 is worth $1.172 million, a gain of 17.2%![1]

Here’s where it gets interesting because, we now know, 2008 was a horrible year for the S&P 500. If you decided to hold, you lost 38.3%. Your original investment of $1 million is now worth $747,392, a loss of 25.2%.

With hindsight, you would have sold your investment on December 31, 2007, to lock in your gains. If you sold, you would’ve been a hero, admired for having the foresight and courage to sell after three years of substantial profits. However, it’s unlikely you would’ve moved from cash to stocks in January of 2009 because we were in the midst of the Great Recession. You probably would have waited two or three more years to get back in the market, missing a 40.5% return. If you reinvested in January 2009, you made 23.6% for the year. If you had the conviction to buy the dip in 2008 and 2009, you made even more when stocks recovered.

If you ignored the bear market and held your stocks during the correction of 2008, you made $2.76 million from 2005 to the year-end of 2019, an increase of 227%. Now that your account balance is $2.76 million, what should you do -sell or hold? If you sell, you’ll pay a capital gains tax of 20%, or $455,243 – a significant number. If you hold, you may encounter another stock market correction. A repeat of 2008 would mean a loss of $1.25 million, but still above your original investment of $1 million.

It’s impossible to time the market, but they’re a few strategies you can employ to protect your assets. The first is to diversify your holdings to include different asset classes like small companies, international stocks, and bonds. A globally diversified portfolio of mutual funds would have lost 20.3% in 2008, not great, but better than a loss of 38%. True, you give up some upside, but you protect your assets to the downside. A balanced portfolio of 60% stocks, 40% bonds generated an average annual return of 6.5% since 2005. Your $1 million investment grew to $2.48 million.[2]

More stock means more risk, but it also means more reward. Buy and hold investors have been rewarded for their patience, and, hopefully, this time will not be different.  If you want to find out the risk exposure in your portfolio, give us a call.

“Go out on a limb. That’s where the fruit is.” — Jimmy Carter

February 3, 2020.

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

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

 

 

[1] YCharts – IVV, 1/1/2005 to 12/31/2019.

[2] Morningstar Office Hypothetical

My Gym

I work out at my local gym twice per week, mostly to lift weights. The amount I lift today is a fraction of what I used to lift while playing football in college, but it keeps me in shape.

My gym is a cross-section of men, women, young, old, fit, and almost fit. During the football offseason, members of the local high school team use our gym to supplement their school workouts. These young men are full of energy and bravado, and they have no coordinated plan for their workout regime. They lift, look in the mirror, look at their phone, talk to their friends, and repeat this process until they leave. They also say “bro” – a lot! I was probably that way in high school, too, except I didn’t have a cell phone. I know if they followed a routine, they’d see better results.

While playing football at the University of San Diego, we had two weightlifting coaches, one a former Navy Seal. They joined our program after my sophomore year and put our team on a weightlifting schedule for the entire year, including football season. I noticed a substantial improvement in my strength and endurance while following their plan.

Now that I’m older and, hopefully, wiser, I still follow their plan because it works. The formula is simple and easy to follow. It was because of their strategy and coaching that allowed me to experience better results.

A plan makes all the difference in the world for almost everything, notably investing. A financial plan can help investors improve their results by giving them a guide on how to achieve their goals. It addresses several issues, including investments, insurance, education, retirement, budgets, debt management, Social Security analysis, to name a few.

Like weightlifting, you won’t see results in a day from your financial plan. It may take months or years before your plan starts to bear fruit. And, like exercise, there will be up days followed by down days requiring you to be patient. During the down days or setbacks, it’s imperative to keep moving forward, regardless of your short-term results. If you completed your plan in October 2007, you were met with a wicked bear market where stocks fell more than 50%. I’m sure you didn’t expect to lose half your investment value within a few months, but if you followed your plan and stayed committed to it, you were able to enjoy a substantial rebound in the stock market from the lows of the Great Recession.

Exercising and investing require regular check-ups to measure your progress. Weightlifters constantly adjust their workouts depending on several factors, investors should do the same. Reviewing your strategy often is recommended based on your circumstances. At our firm, we offer quarterly reviews for our clients to make sure their plan and investments are meeting their needs. I also encourage clients to contact us during a life change – marriage, death, the birth of a child, a job promotion, retirement, etc. It’s easier to tweak your portfolio periodically than it is to do a significant restructuring.

Your plan desires action. If I have a written program for lifting weights, but I don’t follow it, I’m never going to get in shape. After you finish your written financial plan, you need to follow through with the recommendations of your advisor, don’t put it on your shelf to collect dust. Several years ago, I was working with a client who finished setting up a living trust for his family, but he didn’t transfer any assets into the trust. I told him he needed to follow through on his attorney’s recommendations to re-title his assets. He assumed, incorrectly, that since he finished the trust document, he did not need to do anything else. He needed to act on the plan.

Exercising is a lifelong pursuit, as is investing. A consistent, well thought out plan will deliver reliable results over time. Write down your goals, follow your dreams, work with a professional, and good things can happen.

What makes a weightlifting program successful? Your hard work and dedication. ~ Greg Everett

January 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.

 

 

 

 

My College Tuition Experience

The student loan debt crisis is getting worse, not better. The current debt level is $1.5 trillion, and since 2003 it has increased 522% while inflation has risen 42%.  A child born today can expect to pay $655,000 in tuition to attend a private college or $323,000 for a public school.[1]

My daughter recently graduated from a private college in Texas, and, thankfully, we did not use student loans. Shortly after she was born, I opened a Uniform Transfers to Minors Accounts (UTMA) and transferred shares of Philip Morris to seed her account.

When my wife and I started saving for her college, we didn’t have the financial resources to contribute significant amounts of money, so we did what we could with what we had. We added $25 here and there, and when we were able to add more, we did. Her great-grandfather purchased a bond for her account, and her grandparents helped with supplies and books while attending college.

We started investing in her account during the late ‘90s, before one of the worst decades on record for common stocks. During the tech-wreck from 2000 to 2003, stocks fell 47%, so I sold the bond and added more stock. The asset allocation in her account for most of her pre-college years was 100% stocks. We owned JP Morgan, Disney, Pepsi, Apple, Amazon, and Google, to name a few.

When the market fell, I used it as an opportunity to buy great companies at discounted prices. A few years later, during the Great Recession, when stocks fell 53%, I added more companies. I bought the dip at every opportunity. During the first ten years of her life, the S&P 500 had a negative return; however, the next ten were much better, and the S&P 500 returned 338% from when we first started investing for her college career.

After I opened her investment account, I created a spreadsheet to track various colleges from around the country. The original list included fifty different schools, some private, some public. I updated the list annually to get an idea of what it was going to cost me to send my daughter to college. The figures were overwhelming and alarming, but we continued to save and invest.

As she got older, I culled the list. During her junior year of high school, it was cut to five, before she settled on her final choice. In my research, I noticed the smaller the school, the more beautiful the landscaping, the more expensive the tuition. I attended the University of San Diego, and my friends and I joked there were more gardeners than professors on campus.

When she was ready to attend college, I sold enough stocks to cover tuition, room, and board for one year. As we paid her expenses, I would sell more stock to replenish her cash balance. Thankfully, through the power of compounding and a rising stock market, her account kept a steady level, despite the withdrawals.

As I mentioned, when we started saving for college, we weren’t in a great financial position, but we were determined to pay for her tuition. We knew most of the inputs needed to figure out how much to save. For example, when she was born, we knew we were going to need a pile of money when she turned 18, and my spreadsheet allowed us to track the cost of fifty different colleges. As a result, we knew when and how much she would need, so it was an easy calculation.

Here are a few suggestions to help you and your family save for college.

  1. Take an inventory of your financial assets. How much money do you have in checking or savings accounts? Do you own any stocks, bonds, or mutual funds? Does your company offer an employee stock purchase plan (ESSP)? These are assets you can use to fund your child’s account.
  2. Open a 529 education account. The 529 account allows your money to grow tax-free. If you use the money for tuition and other college expenses, the distributions are also tax-free. The funds in a 529 account are invested in various mutual funds.
  3. If you want to purchase individual stocks or bonds, open a Uniform Transfer to Minor’s Account. The money you deposit into this account is considered an irrevocable gift to your child, so if they decide not to go to college and buy a Corvette instead, there’s not much you can do to stop them.
  4. Identify a few colleges and start tracking their expenses. Several websites will help you find the cost of most colleges, and some college websites will also have a tuition calculator.
  5. After identifying the school and cost, start investing. Set up an automatic draft so you can invest monthly to take advantage of the long-term compounding of the stock market.
  6. If the cost of attending a four-year university is too expensive, consider a community college. The tuition for a community college is about a third less than a public college.[2] After a year or two, you can transfer to a university.
  7. Work with a Certified Financial Planner® to help you formulate a plan for paying for college.

Unfortunately, the rate of inflation for tuition is growing at more than 7% annually.[3] At 7%, the cost of college will double every ten years – a sobering thought, so you must own stocks to help you keep up with the sharp rise in the price of tuition.

Regardless of your financial situation, saving any amount toward college will allow you to borrow less.

An investment in knowledge pays the best interest. ~ Ben Franklin.

January 26, 2020

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

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

[1] Money Guide Pro College Cost Calculator

[2] https://www.affordablecolleges.com/rankings/community-colleges/, website accessed January 25, 2020.

[3] https://www.edvisors.com/plan-for-college/saving-for-college/tuition-inflation/, website accessed January 25, 2020.

Rivers and Tributaries

The Mighty Mississippi, The Nile, The Amazon, and The Yangtze are some of the longest rivers in the world, traveling thousands of miles, moving millions of gallons of water every day; critical components to commerce as millions of people, and billions of dollars of freight go up and down the rivers.

The names of significant rivers are known to most people, but what about tributaries? Tributaries are smaller rivers flowing into larger ones, and vital to the support of the more extensive river system. The Big Muddy, Chippewa, and Watab are a few rivers flowing into the Mississippi. Without smaller rivers, bigger ones can’t survive.

Open an atlas, and you’ll discover hundreds of little blue lines crisscrossing the map. These blue lines represent rivers and streams. The Rio Grande borders Texas to the south; the Red River is to the north. In between, thousands of tributaries pour into more significant rivers and the Gulf of Mexico. Some of these dry creek beds will lay dormant until the rain arrives, turning them into raging rivers.

In the investment world, the two leading indices are the Standard & Poor’s 500 and MSCI EFA. The S&P 500 includes the 500 largest companies in the United States. The MSCI EFA is the international index encompassing Europe, Australia, and Far East Asia and includes companies from 21 different countries.[1] These two indices cover the world, and most professional investors rely on them for their primary benchmarks. However, building a portfolio consisting of two broad-based indices isn’t prudent, especially ones so similar.

As small streams are essential to mighty rivers, small stocks are important to bigger ones. A globally diversified portfolio of different sized stocks and bonds will allow you to benefit from thousands of securities scattered around the world.

The past few years, small and international stocks have trailed large U.S. companies, but it won’t last forever. At some point, these sideshows will turn into the main attraction, just like small creeks turning into raging rivers. For the past three years, the S&P 500 has returned 47%, the S&P 600 Small-Cap Index 26.2%, and the MSCI EAFE International Index 19.2%. However, from 2000 to 2010, the Small-Cap Index returned 48%, and the MSCE EAFE International Index rose 30% while the S&P 500 lost 6.5%.[2]

Morningstar tracks over 83,000 global indices[3], so it’s possible to get carried away when building your portfolio. A narrow focus may limit your investment choices, too many, and your account will be overly diversified.

How many different asset classes should you include in your account? At a minimum, your portfolio should consist of large, small, and international stocks, bonds, cash, and an alternative class – so six. Of course, this number can vary dramatically depending on several factors, like your risk tolerance, assets, and time horizon. The broad categories can also include growth, value, developed, emerging, short-term, long-term, high yield, and so on.

Regardless of the number of funds, focus on owning a globally diversified portfolio of low-cost funds based on your financial goals.

If you’re not sure where to start, contact a Certified Financial Planner® who can help you navigate the treacherous waters of the financial markets.

A river is more than an amenity; it is a treasure. ~ Oliver Wendell Holmes

January 21, 2020

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

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

[1] https://www.msci.com/documents/10199/822e3d18-16fb-4d23-9295-11bc9e07b8ba

[2] YCharts

[3] Morningstar Office Hypothetical

Know Your Risks!

During college, my friends and I would often go skiing in Lake Tahoe. I wasn’t a good skier, but I could fight my way down a mountain. Most of the time, I didn’t realize the risk I was taking because my friends were much better skiers, and I went where they went. One afternoon we were skiing at Squaw Valley, when my former roommate, who grew up ski racing and spent one winter working with the ski patrol, decided to ski Chute 75, considered the fifth steepest run in Tahoe.[1] Not only was it steep, but it was about as wide as a hallway. I skied the run under duress and against my will, but I survived.

My family and I recently returned from a ski trip, and my risk level is much lower. I mostly ski groomed blue runs, occasionally mixing in a black diamond run or two. Now that I’m older and wiser, I’m aware of the risks I’m taking while skiing.

This past decade stocks soared 185%, outpacing bonds by 143%![2] It was also the first decade on record without a recession. As the market rises higher, investors want more risk assets, and they are willing to chase returns while abandoning safe assets like bonds.

If you owned a portfolio consisting of 60% stocks, 40% bonds ten years ago, and left it alone, your current allocation is now 80% stocks and 20% bonds.[3] Your original portfolio is now 25% riskier. During the Great Recession, a 60%/40% portfolio fell 35%, and the 80%/20% portfolio dropped 47%.[4] An unbalanced, unmanaged portfolio returned 10.5% for the decade. If you rebalanced your account annually to your original asset allocation of 60%/40%, you earned 9.6% – a good return, with less risk.

January is an ideal time to check the risk level for your investments, especially after last year’s excellent stock market performance. If your risk level is high, lower it by rebalancing your portfolio to its original allocation.

Here are a few ideas to help you make sure your risk level is in line with your goals.

  • Start with the end in mind and work backward. What is your asset target? How much money do you need to meet your financial goals? How much is enough? If you have the assets to retire, sell stocks and buy bonds. Lock in profits, take gains, reduce your risk profile.
  • Review your asset allocation. What is your current allocation to stocks and bonds? A glance at your account statements should give you all the data you need to determine your asset allocation.
  • Examine your stock positions. Do you own any stocks that account for more than 15% of your portfolio? If so, sell half and distribute the proceeds across several asset classes. Diversify your investments.
  • Stress-test your portfolio. What would happen to your investments if the market fell 20%? Are you comfortable with the results? You might be content with a 20% drop in percentage terms, but what about dollars? A $5 million portfolio will lose $1 million if stocks fall 20%. Can you manage a million-dollar loss?
  • Rebalance your accounts. Rebalancing your accounts every year will keep your risk level in check and aligned to your goals. If you participate in your company’s 401(k), you probably have a rebalancing tab that will automate this process for you, so you don’t have to think about it every year. It’s counterintuitive to sell investments doing well to buy ones that aren’t, but this strategy will allow you to maintain a consistent risk profile. And, if you’re comfortable with your investments, you’re more likely to hold them for the long haul.

A Certified Financial Planner® can assist you in reviewing your investments, determining your asset allocation, and analyzing your risk level. They can also help you create a financial plan to make sure you’re on the right trail to achieving your goals. Here’s a link to the CFP’s website to help you find an advisor in your area: https://www.letsmakeaplan.org/. Check it out and give us a call!

Cross country skiing is great if you live in a small country. ~ Steven Wright

January 7, 2020

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

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

[1] http://theliftiereport.rentskis.com/tlr/the-10-steepest-ski-runs-in-california/, Website accessed January 12, 2020

[2] Ycharts – S&P 500 Index and Vanguard’s Total Bond Fund.

[3] Morningstar Office Hypothetical – Vanguard S&P 500 Index Fund & Vanguard Total Bond Fund

[4] RiskAlyze

Ice Cream and Investing

My friends and I would ride our bikes (Schwinn’s) to Thrifty’s Store to get ice cream. Thrifty’s ice cream was the best, and it was economically priced for young kids – 5 cents for a single, 10 cents for a double, 15 cents for a triple. Thrifty’s used an ice cream gun to produce near-perfect cylinders, ideal for stacking a triple scoop in a sugar cone. My three go-to flavors were mint chip, chocolate chip, and rocky road – in that order. I had no desire for peach, strawberry, or vanilla. Thrifty’s, at the time, only had about ten flavors, so if my friends wanted more variety, we’d ride to Baskin-Robbins. I would still order my three favorites, however.

Ice cream and investing have much in common because it has something for everyone — some like vanilla, others chocolate. Individual stock pickers might spend hours doing research, reading reports, talking to companies, or listening to analysts hoping to find a unique flavor at a bargain. Or worse, they may watch an expert on TV talking about ice cream, and without any knowledge, they buy gallons of the flavor before tasting it because some guy told him it was going to be good.

Mutual fund investors rely on others to choose the ice cream for them, regardless of flavor. The investors give up the right to select peach or mocha because the flavors are handpicked by the money manager. A mutual fund ice cream owner will get the best flavors, and the worst. In addition to my three favorite flavors, I will also get ones I don’t like. However, the tasty flavors will outnumber the bad ones, and over time, the bad ones will go away.

Trying to pick individual stocks is challenging because you’re continually searching for the next big winner on a limited budget. Today if you decide to buy several ice cream cones with a dollar, you’re not going to get many, or any. And, if you’re fully invested, you must sell one stock to buy another. Do you sell vanilla to buy chocolate? Trading stocks can be expensive, and it’s not tax efficient.

Owning a globally diversified portfolio of low-cost mutual funds is a better solution for most investors because you can own several thousand stocks and, gasp, bonds. I prefer not to eat strawberry ice cream, but millions do. If my mutual fund owns strawberry ice cream, I win even if I don’t eat it. My globally diversified portfolio gives me exposure to stocks on the other side of the world that I would not have chosen myself. Chinese people like black sesame ice cream, Indians want jackfruit, and Swedes prefer ice cream with lingonberries[1]. If I didn’t own a global portfolio, I would miss out on these distinctive flavors.

Here are a few reasons to own a globally diversified portfolio of low-cost mutual funds.

  • Your investment portfolio is a function of your goals, whether you’re aggressive, conservative, or somewhere in between. If your investments match your goals, you’re more likely to hold on to them regardless of market conditions allowing you to capture the upward trend in the stock market.
  • Your costs will go down because you won’t need to trade because your account is being managed for the long haul by your fund managers.
  • Mutual fund companies are in a trade war as they compete against each other to lower their fees. Their pain is your gain. Schwab, Fidelity, Vanguard, and T.D. Ameritrade each have waived their trading commissions. Dimensional Fund Advisors is lowering fees on 77 of their funds. The cost of their U.S. Large Company Portfolio is dropping 40%![2]
  • A balanced portfolio will remove your investment bias and tendencies. I prefer buying large companies with growing dividends, but I also need to own small international growth companies that don’t pay any dividends. A global portfolio allows me to hold a variety of stocks, especially ones I would never buy on my own.

I own a globally diversified portfolio of low-cost mutual funds because it allows me to enjoy my life and focus on things I want to do, like eat ice cream.

I scream, you scream, we all scream for ice cream! ~ Howard Johnson

January 7, 2020

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

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

 

 

 

 

 

[1] https://www.zagat.com/b/crazy-ice-cream-flavors-around-the-world, by Linnea Covington, June 1, 2016.

[2] https://www.barrons.com/articles/dimensional-fund-advisors-enters-the-asset-management-fee-war-51577137749, by Evie Liu, December 23, 2019