My Fee Is Better Than Your Fee

Advisors, brokers, planners, bloggers, vloggers, Fin Twit experts, and other pontificators are praising the benefits of their own fee models while bashing all others. Strong opinions about whose fee schedule is best is a common thread. At the end of the day, however, a fee is a fee regardless of how it’s charged.

Firms may combine fee platforms or institute pricing tiers with minimum fees. For example, advisors may bill you hourly for their financial planning services while charging you an asset management fee.

One of my clients has been hounded by a stockbroker who has been trying to sell her an annuity. He told her the purchase would not cost her anything. After some research, I found out that he was going to receive a 5% commission.

Several years ago, an insurance agent approached me about buying a whole life insurance policy with an annual premium of $100,000. I was also told I wouldn’t incur any out of pocket expenses or fees. He was going to make $55,000 if I had purchased the policy.

If a broker tells you it won’t cost anything, you’re probably going to get fleeced.

Fees are confusing, especially if they’re called something else. It’s all semantics. Here’s a guide to help you navigate the murky waters of fees. This will help you identify the various types you might incur when you’re meeting with a financial professional or reviewing your account statements.

Commissions. If you buy or sell a stock, a commission will be added to or deducted from your trade. Bonds will also trade with a commission ranging from $1 to $30 per bond. If you purchase 100 bonds ($100,000) and you’re charged $10 per bond, your fee will be $1,000. This is referred to as a markup or markdown. Exchange traded funds and options will also trade with a commission. The more your broker trades, the more commissions they’ll earn.

Front End Load. Mutual funds with a front-end load will have commission rates ranging from 1% to 5% or more and it will be deducted from your purchase. If you invest $100,000 into a fund with a 4% front-end load, your fee will be $4,000, so $96,000 will be invested. The most common type of front-end loaded mutual fund is referred to as an “A” share.

Back End Load or Deferred Sales Charge. Funds and annuities with a deferred sales charge will charge a fee if you liquidate early. A declining sales charge is applied based on the number of years you own your holding. A fund may have deferred sales charge that declines over five years where 5% is deducted the first year, 4% the second year, 3% the third year and so on. If you invest $100,000 into a fund with a deferred sales charge and you sell it in year three, the fund company will deduct 3%, or $3,000 from your proceeds. The most common share class with back end loads are “B” and “C” shares.

Wrap. A wrap account will charge a percentage based on your investment but not charge a commission for your trades because the commissions are wrapped into the fee. Wrap accounts are popular with brokerage firms. They’ll offer you an investment account that owns 50 to 70 stocks or more. Depending on the size of your investment, you may own 2 to 3 shares of a company and If you were paying commissions, the fees could climb quickly. I worked for a large brokerage firm several years ago and our wrap-fee program charged clients 3% per year – an extremely high fee.

AUM. The asset under management fee model is popular with Registered Investment Advisors. An advisor may charge you a fee of 1% on the assets they manage on your behalf. The fee drops with the more assets you have under management.

Retainer. A retainer fee model will give you access to an advisor or planner for a specific project or timeframe, but it may not include managing your assets. It’s similar to an a la carte menu at a restaurant.

Flat Fee.  Your fee is flat, or fixed, regardless of your asset level. This model favors large accounts and punishes smaller ones. Advisors will charge a flat fee for financial planning and investment management services. This fee differs from the retainer model because the relationship is intended to be long-term.

Hourly. This model works well if you want a limited scope offering or a one-time analysis like a second opinion. It also appeals to investors who want to pick their own investments but want guidance with their asset allocation or financial plan. Advisors may charge $250 to $500 per hour to create a financial plan, review your investments, or give you guidance on a special project.

Subscription. This is a relatively new model primarily aimed at millennials or high-income earners with little assets. A fee is charged based on your income or net worth and it’s billed monthly, like a car payment. Services may include budgeting, cash flow planning, debt reduction, 401(k) guidance, and investment selection.

Hedge Fund. Hedge funds typically have a 2 and 20 model. They’ll charge you 2% on your assets and receive 20% of your trading profits. For example, if you invest $1,000,000 and it grows to $2,000,000, your hedge fund will earn 2% on $2,000,000 and receive $40,000 in fees. They’ll also earn $200,000 on your trading profits.

Regardless of where or how you purchase a mutual fund, exchange traded fund or annuity, they’ll have ongoing fees and expenses. Mutual funds and ETF’s have operating expenses (OER) and the fees vary wildly. Mutual funds may also have a 12b-1 fee, charging you another .25% on top of the OER. An annuity has fees for mortality, riders, administration, and investments – to name a few. Annuity fees can climb to 3% or more. Individual stocks, bonds and options do not have ongoing fees or expenses after they’re purchased.

Fees come in all types of flavors, so pick one that works well for you and your family. If you’re concerned about fees, then open an account at T.D. Ameritrade, Fidelity, Vanguard, E*Trade, or Schwab and only buy individual stocks, bonds or low-cost index funds. The commissions and fees will be low so long as you don’t day trade your account.

Fees are important, of course, but it’s more important to work with an advisor you trust. One who puts your interest firsts and acts in a fiduciary capacity is recommended.

What about our fees? We charge .5% ($5 per $1,000) for assets under management which includes a financial plan. Our stand-alone financial planning fee is $800.  Good conversation, fellowship and bad jokes are free.

In the long run, we shape our lives, and we shape ourselves. The process never ends until we die. And the choices we make are ultimately our own responsibility. ~ Eleanor Roosevelt

June 25, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

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

 

 

 

 

 

Dry Powder

Active stock traders need to keep some dry powder so they can buy stocks when the stock market falls. Dry powder usually means cash. Allocating a portion of your portfolio to cash will be a drag on your returns, especially in a low interest rate environment with a rising stock market.

Traders need to be nimble so they can pounce on stocks when they drop. A cash hoard gives them the opportunity to act quickly without selling another position. This strategy works well when stocks fall, and they act on their impulse. If they time their purchase correctly, they can make a lot of money. Of course, if they don’t act quickly or time their purchase correctly, their strategy is for not. In a stock picker’s market cash is needed.

Traders look for fallen angels and Boeing is a classic example. Due to their unfortunate tragedies, the stock has dropped from its high of $440. Traders felt that Boeing below $400 was a bargain. The stock went through $400 like a hot knife through butter, falling another $62 to $338. Traders took their dry powder to buy it at $400 only to see their investment fall 15%.

Timing the market is extremely difficult. According to one study, asset allocation accounts for 93.6% of your investment return with the remaining 6.4% attributed to market timing and investment selection.[1]

During the fourth quarter of 2018 the Dow Jones fell 12.5% and investors withdrew $183 billion in mutual fund assets. Investors were storing up some dry powder, I guess. This year investors have added $21 billion to mutual funds, or 11.5% of what they took out last year. Meanwhile, the Dow has risen 13.8%. Dry powder?

A better strategy for most investors is to own a portfolio of low-cost index funds, diversified across asset classes, sectors and countries. This portfolio will give you exposure to thousands of securities doing different things at different times. It will allow you to stay fully invested because you never know when, where, why, or how the stock market will take off. It reduces your risk of market timing and eliminates the cash drag on your performance.

But what if, or when, the market falls? In a balanced portfolio you will own bonds of different maturities. For example, during the Great Recession stocks fell 56%. Long-term bonds were up 16.6% while intermediate bonds stayed steady at 2.94%. Dimensional Fund Advisors Five-Year Global Fixed Income fund rose 4.9%. True, they did not offset the entire drop-in stocks, but they did hold their own.

It’s possible, and recommended, to rebalance an index portfolio on a regular basis. When your asset allocation changes, rebalance your portfolio to return it to its original allocation. This strategy allows you to buy low and sell high on a regular basis. I once heard an advisor compare rebalancing to getting your haircut. When your hair gets too long, cut it back to its original length.

Shouldn’t stock pickers make money in a stock picker’s market? According to Morningstar only 24% of active equity mutual fund money managers beat their passive index over a 10-year period.[2] Is it possible to pick the top quartile funds every year for the next ten years? Doubtful.

Dimensional Fund Advisor’s found that over a 20-year period only 42% of equity funds survived. Their database started with 2,414 funds and only 1,013 survived twenty years. If more than half the funds fail, how will you be able to pick the top 25%?[3]

Rather than keeping dry powder or trying to time the market, focus on your financial goals and invest in a balanced portfolio of low-cost index funds.

Don’t let dry powder blow up your portfolio!

My mission in life is not merely to survive, but to thrive; and to do so with some passion, some compassion, some humor, and some style. ~ Maya Angelou

June 19, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

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

 

 

 

 

[1] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.

[2] https://office.morningstar.com/research/doc/911724/U-S-Active-Passive-Barometer-7-Takeaways-from-the-2018-Report, Ben Johnson, February 7, 2019

[3] file:///C:/Users/parro/Downloads/2019%20Mutual%20Fund%20Landscape_%20Report.pdf

What Are You Doing This Summer?

Summer has arrived and its vacation time! Travelers will be crisscrossing the globe in search of the perfect family vacation. Individuals will spend between 10 to 20 hours researching their vacation.[1] Proper planning will make your vacation more enjoyable.

Deciding where to go is only half the battle. Once you pick a location, then everything else will fall into place. How will you get there? What will you do? Etc. For example, if you’re going to Hawaii this rules out driving. A trip to Death Valley means you won’t be scuba diving.

Early planning can enhance your vacation experience. It will give you more options and potentially better rates. Last minute planning is frustrating. If you wait until the last minute to plan your trip your choices may be limited and more expensive.

Vacations aren’t cheap. The average cost is $1,145 per person, so a family of four can expect to spend $4,580.[2] About a quarter of the population will finance their trip with credit cards, personal loans, or a short-term payday loan.[3] Financing your vacation can add an extra 20% to 25% to your cost.

I love planning – all types. A few years ago, my family and I spent three weeks trekking around Europe by planes, trains and automobiles. It took me a year of planning to work on the logistics. Colored spreadsheets helped me with our travel plans, side trips, dining options, entertainment, and budget. It was one of our best family trips.

National Plan for Vacation day is January 30. According to travel research, they recommend a planning window of two to three months. The same study mentions that Americans leave 662 million unused vacation days on the table each year resulting in a “$236 billion missed opportunity for the U.S. economy.”[4]

Missed vacation days and poor travel planning won’t be detrimental to your family’s future but failing to plan for your financial future will be.

Unfortunately, people spend more time planning their vacation than they do their financial future. If you spent 10 to 20 hours per year on your financial plan, it may have life changing results. In fact, Individuals who complete a financial plan have three times the assets of those individuals who do little or no planning.[5]

Financial planning is not as fun as planning for a family vacation, but it’s necessary, especially if you want to maintain your lifestyle in retirement. Financial planning will give you options. It will give you flexibility. Your plan will confirm your current lifestyle or give you suggestions for changes.

Spending one to two hours per month reviewing your financial status can pay lifetime dividends. Your plan will direct your steps, like a trail map. It will give you a financial destination. Once you determine where you need to go financially, everything will fall into place.  Deciding on how much money you’ll need in retirement is paramount. Here are a few planning tips to get you started.

  1. Take an inventory. What is your current financial situation? Where are your assets? How are they performing? What fees are you paying? In addition, track your expenses. Get a handle on how and where your money is being spent.
  2. Set goals. What do you want to do when you retire? Travel? Setting financial goals is just as important, if not more so, than goals like losing weight or getting in shape. According to the Peak Performance Center, “Your goals give you a clear focus on what you believe to be important in life.” If a goal is important to you, you’ll figure out a way to make it happen.
  3. After taking an inventory and setting goals, it’s time to prioritize your list. Your list might be long, so spend some time culling it. Reduce your list to three to five items you can pursue because too many goals may lead to inertia.
  4. After you’ve figured out what you have and what you want to do, put it to work. Activate your plan. Once your plan is up and running, then you can spend a few hours a month reviewing and tweaking it as needed.
  5. Hire a planner. If you’re not comfortable creating and implementing your plan, hire a Certified Financial Planner®. A CFP professional will help you quantify and prioritize your goals. In addition to developing your plan, they’ll act as your accountability partner. Hire a planner with the CFP® designation who works for an independent Registered Investment Advisory firm, is fee-only, and acts in a fiduciary (best-interest) capacity. You can search for an advisor in your area on these websites: feeonlynetwork.com, www.napfa.org, or www.cfp.net.

Your financial plan can give you a lifetime of vacations if you plan accordingly. It will free you to enjoy your trips. Don’t wait. Start planning today.

Enjoy your summer and safe travels!

No matter what happens, travel gives you a story to tell. ~ Jewish Proverb

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

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

 

[1] https://www.vacationkids.com/vacations-with-kids/how-much-time-does-it-take-to-research-and-plan-a-family-vacation, Sally Black, June 20, 2017

[2] https://www.creditdonkey.com/average-cost-vacation.html, Kim P, October 8, 2018

[3] https://www.finder.com/vacation-loan-debt, Website accessed June 19, 2019

[4] https://www.travelagentcentral.com/running-your-business/stats-less-than-half-americans-take-time-to-plan-vacation-days, Newsdesk, January 29, 2018. Website accessed June 19, 2019.

[5] http://www.nber.org/papers/w17078

Financial Mystery Dinners

Murder mystery dinners are popular. At these dinners’ guests try to guess who committed the crime based on a series of clues. Guests are also part of the show and may be prime suspects. You might have attended one of these events in the past, but have you ever been to a financial mystery dinner?

Let’s say you’re invited to a financial mystery dinner to solve a financial crime. The storyline is that four of the guests will run out of money in retirement. Why four?

According to The Employee Benefit Research Institute, 40.6% of households are projected to run out of money in retirement.[1] They have been conducting this survey since 2003 and the numbers are grim, especially for single women.

In another study from the World Economic Forum, they found that men could outlive their savings by 8 years and 11 years for women.[2]

The Federal Reserve estimates the average retirement account balance is $60,000.[3]  If your IRA balance is $60,000, you can expect an annual income of $2,400 – before taxes!

If you depleted your savings and had to rely solely on Social Security, the average monthly benefit is $1,345 or $16,248 per year.[4]

Here are the guests. Can you identify which four will run out of money during their retirement?

Marty Millennial. He’s a young man living at home. He earns a decent salary but keeps his money in a low yielding savings account at a major bank. He reluctantly contributes 2% of his salary to his 401(k) plan.

Tammy Teacher. Tammy has been an elementary school teacher for several years. She contributes to a 403(b) plan and she’ll receive a pension payment from her state when she retires. Her husband is a firefighter who will also receive a state pension.

Sandy Salesman. Sandy is a hard charging salesman who drives a Ferrari and wears a gold Rolex watch. He’s self-employed, has a small IRA, and changes jobs every 1 to 3 years to pursue a larger sales territory with better leads.

Robby Retiree. Robby has been retired for a few years. He and his wife love to eat out and travel. They own a large home, live on a golf course, and drive a Range Rover. He has an IRA and a few investment accounts. He’ll receive Social Security in two years. His wife was a homemaker and she’ll receive spousal benefits from Social Security when Robby files for his benefits.

Donna Doctor. Donna is a surgeon at a huge hospital in a major city. She graduated from medical school with several thousand dollars’ worth of student loans. She is a high-income earner who works long, stressful shifts.

Peter Pilot. Peter is a pilot for a major airline. He’s been flying for about 15 years. His airline offers a pension, but he is concerned about the financial stability of his employer. He knows the sad history of airline carriers going bankrupt. He’s now a first officer. He has three kids and they all participate in club soccer.

Linda Lawyer. Linda is a trial lawyer. She and her husband have two daughters who are about to get married. Her firm has generous benefits including profit-sharing and cash balance plans. Her husband is a staff accountant for a local municipality.

Danny Developer. Danny is a computer programmer for a high-tech company. He’s paid handsomely for his coding skills and he’s been rewarded with stock options and restricted stock. His company will go public this year.

Ashley Athlete. Ashley is a professional soccer player for a team located on the East Coast. Her salary isn’t great, but she earns extra income from endorsements and coaching soccer clinics.

Frank Farmer. Frank owns a farm in Texas on several thousand acres. He grows corn and wheat and earns a decent living from his crops. He and his wife have four children and seven grandchildren. His family will have an estate tax issue when Frank and his wife pass away.

How did you do? Which four guests will run out of money? Of course, there’s no way to know with the limited clues given, so time will tell. However, here are a few things you can incorporate today to improve your odds of enjoying a successful retirement.

  • Invest for growth. Over time, stocks outperform bonds and cash by a wide margin. Stocks do carry risk, but not bigger than the risk of running out of money in retirement. If you invested $10,000 in stocks ten years ago, it would be worth $26,220 today. The same amount invested in short-term bonds would be worth $10,060.
  • Save early and often. The sooner you start saving, the better. Even if you’re going to receive a pension, Social Security, or other guaranteed payouts, you still need to save your money. How much? A suggested amount is 10% to 15% of your annual income.
  • Contribute to your company retirement plan. A 401(k) plan is a great tool for creating wealth, especially if your company offers a match. If you contribute 5% of your income and your company matches 5%, your making 100% on your investment. 401(k) plans are efficient and easy to use. Invest for growth because you won’t be able to touch this money for 10, 20, 30 years or more.
  • Pay off debt. Eliminate high credit card debt, auto-loans, student loans and mortgages before you enter retirement. High levels of debt will be a hindrance to a successful retirement. According to one study, the average debt balance for individuals age 75 or older is $36,757.[5]
  • Create an emergency fund. A cash hoard will help you when trouble hits. It will also allow you to pay for things without using a credit card and accruing more debt. A recommended cash amount is three to six months of household expenses.
  • Develop a spending plan. A spending plan will help you identify how your money is being spent. It will give you an opportunity to reduce, or eliminate, your expenses.
  • Generate a financial plan. A financial plan solves a lot of financial mysteries. It will reveal the clues needed to produce a fruitful retirement. It will give you direction.

Don’t be caught short in retirement. Do all you can today to make sure you have financial assets when it matters most. It would be a crime not to!

Just the facts ma’am. ~ Joe Friday

June 14, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

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

 

 

 

[1] https://www.fool.com/retirement/2019/05/19/heres-how-many-us-households-will-run-out-of-money.aspx, Christy Bieber, May 19, 2019

[2] https://www.barrons.com/articles/outlive-retirement-savings-world-eonomic-forum-retiree-global-51560453625?mod=hp_DAY_6, Reshma Kapadia, June 13, 2019

[3] https://smartasset.com/retirement/average-retirement-savings-are-you-normal, Amelia Josephson, April 16, 2019.

[4] Ibid

[5] https://www.cnbc.com/2018/04/04/growing-debt-among-older-americans-threatens-retirement.html, Annie Nova, April 4, 2018

Spend It Like Beckham

A client called recently to let me know he was going to make a major purchase. He wanted to know if his purchase was going to affect his investments. After a few clicks through his financial plan, we determined he could make the purchase and it would not have an impact on his long-term goals. He made the purchase.

Over the years I’ve had several conversations with clients about purchasing big ticket items from cars to boats to planes.  I worked with a gentleman that purchased a sizable apartment in Paris. He had the financial resources to make it happen and the total cost was a fraction of his net worth. Another individual was building a home on an island in the Pacific Northwest. He was going to turn it into a B&B with Ferrari’s and an airplane (he was a former pilot for a major airline.) After completing his financial plan, I told him he couldn’t afford all his purchases. He had to choose between the home, the cars or the plane.

Lately there has been a lot of discussions, blogs and articles about giving up coffee so you can afford a comfortable retirement. It’s unlikely a cup of coffee will derail your retirement, but I get the spirit of the argument. Spending money on coffee or a Cartier watch makes sense if you have the money.

Money is a use asset. It’s designed to buy goods and services. It doesn’t make sense to die with millions of dollars in your bank account. Of course, blindly spending on things can destroy your financial future. So how do you know how much money you can spend? Here are a few thoughts.

Do the math. The stock market is performing well this year, rising 11.5%. A balanced portfolio of 50% stocks and 50% bonds is up 9.4%. If you started the year with a million-dollar portfolio in a balanced account, you’d be up $94,000.  Withdrawing $50,000, $60,000 or $70,000 from your account will not hurt you financially.

More math. If your account is averaging a 5% return every year and your withdrawing 4% from your account, you shouldn’t run out of money. For example, you start with a million-dollar portfolio and withdraw $40,000 for ten years. After ten years you received $400,000 and your account balance is worth $1.125 million. Here’s a real-world example: You invested $1,000,000 in Vanguard’s Balanced Index Fund (VBINX) 25 years ago and withdrew 4% of the account balance each year. After paying taxes and fees, your account balance is worth $2.5 million today, and you received $1.8 million in distributions.[1]

Establish a spending plan. A spending plan, or budget, will help you with your purchasing decisions. Knowing where your money is going is half the battle. Recording your spending habits is a liberating experience.  Setting up a slush fund for impulse items will allow you to make stress free purchases. Your budget will also help you with buying big ticket items. The best place to start for your spending plan is to review your bank and credit card statements for the past 6 months.

Create a financial plan. A financial plan is a difference maker. In addition to reviewing your spending habits, it will incorporate your assets, liabilities, hopes, dreams and fears. Most of my clients have completed a financial plan so when they call to ask if they can make a major purchase, I’m able to answer their question in minutes. Also, when the market is falling like it did in December, I was able to tell clients their financial future was not in peril. A financial plan is paramount if you want to succeed financially.

If you have the money and the resources to buy something, go for it! Spending your money is acceptable, especially if you’ve run the numbers and it falls in line with your budget.

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

June 13, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.  This article has nothing to do with David Beckham. I’ve never met him, and I have no idea how he spends his money.

 

 

 

 

 

[1] Morningstar Office Hypothetical – 5/31/1994 – 5/31/2019.

E Ticket

Growing up in Southern California I went to Disneyland often.  In the ‘70s they issued tickets rather than an all-inclusive pass. Their ticket system used letters – A through E, with an E Ticket being the most coveted. They were the most popular and exciting rides like the Matterhorn or Space Mountain.  The ticket book consisted mostly of A tickets with a couple of E tickets. My friends and I would scour the park looking for E Tickets if we ran out of money to buy more. At the end of the night, I’d go home with several A tickets stuffed into the front pocket of my Toughskin jeans

The Matterhorn and Space Mountain were a blast to ride. Rising, falling, and twisting at high speeds is a thrill – but not for everybody. Slow, steady climbs followed by steep and rapid drops aren’t for the faint of heart.

The stock market is like a roller coaster. It’s a slow steady climb punctuated by a few steep and rapid declines. Last year is a perfect example.  From January 1 to October 3 the Dow Jones rose 8.5%. From October 3 to December 24 it fell 18.7%.

The VIX is the volatility, or risk, index and it spiked 210% as the market fell during the fourth quarter of last year. The VIX is currently trading around 16. At 16, it projects a 1% daily move in the stock market. With the Dow currently trading at 26,000 a 1% move means the market can rise or fall 260 points daily.

To calculate how much an index, or stock, can move divide the implied volatility by the square root of 256. What is the square root of 256? It’s 16. Why 256? There are approximately 256 trading days during a calendar year. The current implied volatility of the VIX is 16, 16 divided by the square root of 256 is 1. If implied volatility spikes to 32, then the daily move in the market would be 2%, or 520 points – up or down.

The implied volatility of Apple is about 28, meaning a daily move of 1.75% (28/16). Apple is currently trading for $189, so a 1.75% move is $3.30 – up or down.

Volatility returned to the market in May. From January through April the Dow Jones rose 14% with barely a ripple. In May it fell 6.1% while volatility leaped 26.4%.

Risk, volatility and wealth are intertwined. The stock market carries risk, and therefore you can earn an equity premium, and this is where wealth is created. Since 1926 stocks have risen around 75% of the time, averaging 10%. U.S. T-Bills are safe and have never lost money, however, after taxes and inflation are factored into your returns, they become negative.

How should you handle volatility?

Buy the dip. Stocks rise and fall. When they drop, use it as an opportunity to buy quality stocks or index funds. If you had the courage to buy stocks on Christmas Eve, you would’ve made 19% on your investment.  During the Christmas Eve rout stocks fell 6.3% or about 1,400 points, so buying stocks would’ve required fortitude and grit.

Keep a shopping list. Identify stocks or funds you want to purchase at lower prices and when the market falls it will give you an opportunity to buy some shares.  For example, the price of Apple dropped to $146 in December. It’s now trading at $190 – a gain of 30%.

Automate. Automate your investments to remove emotion from the buying process.  Set up a monthly draft from your bank to your investment account and you’ll be able to dollar cost average into the stock market regardless if it’s up, down or sideways. Investing $100 per month for the past 20 years in the Vanguard S&P 500 index fund is now worth $64,266 – an average annual return of 8.13% per year.

Buy bonds. If you’re concerned about volatility in the stock market, buy bonds. U.S. Government bonds are a great hedge for falling stocks. As stocks fell in May, long-term U.S. Government bonds rose 6.4%. During the market meltdown in 2008 government bonds rose 28%.

Do nothing. Volatility is like turbulence; it will eventually pass. When an airplane hits a turbulent patch, the pilot reminds us to stay seated and tighten our seatbelt. The pilot knows it will be temporary.  Flying is a few moments of fear mixed in with hours of boredom. May is gone and the first week of June is looking good for stocks. In fact, it’s the best weekly performance of the year.

Don’t panic. Investors without a plan sell stocks when the market falls and buy when it rises. When the market isn’t cooperating – sit tight. In December investors withdrew $183 billion from mutual funds as the market fell. When the market rebounded in January and February, they added $43 billion. If you sell when the market is falling, you’ll miss the rebound and the opportunity to generate meaningful long-term gains.

Volatility is part of investing. It is a tool you can use to enhance your returns, if you use it correctly.

Stay in your seat come times of trouble. Its only people who jump off the roller coaster who get hurt. ~ Paul Harvey

June 7, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

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

 

 

 

 

Fake News!

Fake News is everywhere, I think. Who knows?

Fake news is on the rise, undermining credible news stories and causing angst. It attacks people, places and things by reporting stories that aren’t true. People shoot first and ask questions later by reacting to false headlines. Online posts, media outlets, and Heads of State rant against the proliferation of fake news stories. If someone doesn’t like a post or news story, they shout: Fake News! With all the data circulating the internet it’s imperative that you spend time separating the wheat from the chaff.

Fake news is alive and well in the investing world. Here are a few examples:

  • I don’t need to save money to accumulate wealth. False. One of the largest components to your wealth creation is how much money you save and invest monthly. How much should you save? A suggested amount is 10% to 15% of your income. If you’re waiting for a lottery ticket, corporate buyout, IPO, or inheritance from a rich uncle, you may be waiting for a long time – possibly forever. Saving $1,000 per month for 30 years will grow to $1.2 million if you can earn 7% on your investment.
  • I can borrow my way to wealth. Debt is an anchor and it will hinder your opportunities to create wealth. The more debt payments you’re making, the less money you can invest. Debt is also a fixed cost and will last the life of your loan. For example, if you borrow $300,000 for 30-years at 4.5%, it will cost you $247,000 in interest.
  • I’m young, I don’t need life insurance. If you’re married with young kids, have a mortgage, a few car loans, and a student loan or two, you need life insurance. How much? At a minimum you’ll need enough to pay off all your debts. If you include the cost for college and survivor income for your spouse, it will add to the amount of life insurance you’ll need. A stay-at-home spouse needs life insurance as well.
  • I’m young so I don’t need to save money until I’m older. Dave Ramsey tells a story about Jack and Blake. Jack is 21 years old and saved $2,400 per year for nine years and then stopped investing. He invested a total of $21,600 and it grew to $2.54 million. Blake, on the other hand, started investing at age 30. He invested $2,400 for 38 years. His total investment of $91,200 grew to $1.48 million. Jack’s nest egg is more than a million dollars greater than Blake’s all because he started when he was young.[1]
  • I’m old, I don’t need to invest for growth. You may live to age 100, or beyond. A person who retires at 65 might spend 35 years in retirement. If you retire your money to a bank or money market fund when you stop working, it will lose value after you factor in inflation and taxes. At a 3% inflation rate, your dollar will lose 35% of it’s value after 35 years – a loss of 1% per year. Contrast this to an investment in Vanguard’s S&P 500 Index Fund on May 29, 1984. A $10,000 investment is now worth $398,000!
  • I can trade my way to prosperity. Day traders, market timers and speculators generate high commissions, short-term tax liabilities, but not wealth. Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% is attributed to market timing and investment selection.[2]
  • I can keep up with the Joneses. Do your friends drive Ferraris and drink Screaming Eagle Cabernet Sauvignon, but you drive a Prius and drink La Croix? If so, hanging out with your friends could be damaging to your wealth. Trying to keep up with your neighbors financially is a fool’s errand. Focus on your finances, not theirs. Who cares if your neighbor has a bigger boat?
  • I don’t need a financial plan. Have you tried taking a road trip without a GPS? Have you ever been lost on a mountain trail without a map? If you’ve ever planned a family vacation, you know the benefit of a solid plan. A financial plan will help you quantify and prioritize your goals. It will be your guide and travel companion.

Facts matter, especially when it comes to investing. Investment truth for success: Invest early, invest often, think long-term, keep you your fees low and create a financial plan.

The problem with quotes on the Internet is that it is hard to verify their authenticity.” ~  Abraham Lincoln (source: the Internet)

May 30, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

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

[1] Financial Peace University

[2] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.

Measure Twice, Cut Once.

I love DIY projects.

This past weekend I was going to fix my garage door. I researched the issue, watched a few YouTube videos and talked to some professionals. I felt confident I could fix it, so I ordered the supplies.

The project was going well until I started to add the new part. It wasn’t working. I reviewed the instructions, but no luck. Frustrated, I gave up after an hour and went back to the drawing board. After my review, I figured out that the part I had ordered was 1/16th of an inch too big, so I ordered another replacement part. When it arrived, I completed the project in less than ten minutes. A friend of mine once told me with the right tools you can fix anything. He was right.

The primary tool for an investor is the financial plan. It will give you a blueprint on how best to construct, or fix, your financial life. There isn’t a good plan or a bad plan, there’s only your plan. It will give you a picture of your current financial situation. How does it look? Are you on track to reach your financial goals? Do you need to make any adjustments? Will your fix be a tweak or a major overhaul?

Like a construction project, a financial plan can appear daunting. Here are a few suggestions to help you get started.

Take an inventory of your financial assets. Where are they located? Do you own stocks, bonds or mutual funds? Do you have a 401(k) or company retirement plan? If so, gather all your statements and put them in an investment folder.

Gather your important documents like tax returns, insurance policies, and Social Security statements. Put these items in your important documents folder.

Identify your income. In addition to your job, do you generate income from other sources? Royalties? Rental Income? Pension? Print your paystubs, W-2s and 1099s and put them in your income folder.

Create a budget or spending plan. Where is your money going? The best way to create a budget is to review your past six months of bank and credit card statements. Write down your expenses and then create categories like housing, shopping, groceries, entertainment, and so on. Once you’ve gathered this data, put it in your budget folder.

Do you have debt? Do you have a mortgage? Car loan? Student loan? Credit card debt? Print out all your statements that identify your debt levels, payments, balances and interest rates. After this is done, put your statements in a debt obligations folder.

Establish your goals. Do you want to travel the world? Buy a second home? Volunteer? Retire early? Start a new business? Leave a bequest? Write them down, all of them. Dream big. Once this is done put your list in a goals folder.

List your concerns. Are you worried about your finances? Are you concerned about running out of money? Market losses? Dying early? Living too long? After you write down your concerns and fears, put them in your concerns folder.

Once your exercise is complete you should have several folders identifying your assets, goals, and concerns. You now have the foundation for your financial plan. Schedule a meeting with your advisor or planner to hand over all your folders. They will review the data and build your plan. Simple.

You now have a financial plan to help guide you toward achieving your goals. I know you can do it!

Hammer away!

Real men don’t use instructions, son. Besides, this is just a manufacturer’s opinion on how to put this together. ~ Tim Allen

May 29, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

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

 

 

 

 

 

 

 

Morehouse College

The graduating class of Morehouse College received an unexpected gift from their commencement speaker.  Mr. Robert F. Smith offered to forgive all the student loans for the class of 2019. Mr. Smith is a billionaire, philanthropist, investor, and fellow Austinite who announced his generous offer to the students this past Sunday. He said, “My family is going to create a grant to eliminate your student loans!”

The announced figure was $40 million. There are about 400 men graduating from Morehouse College so the average debt per student is $100,000. Quite an offer.

The beauty of his gift is that he can watch these young men bear fruit. He will witness firsthand how it will multiply many times over for generations to come. He added, “Now, I know my class will make sure they pay this forward.”

Individuals often wait until they die to give their money away for fear of it running out while they’re still living. Is one strategy better than the other? It’s a personal choice, of course, but giving your money away while you’re alive will allow you to observe the joy of helping others.

Do not withhold good from those to whom it is due, when it is in your power to do it. ~ Proverbs 3:27.

Are you blessed with financial resources? If so, here are a few ways you can help others.

Loan Forgiveness. You might not have $40 million sitting in your bank account but if someone owes you money, you can forgive their debt. A generous offer to those in debt, for sure. However, let them know it will likely be reported as taxable income. For example, if someone owes you $100,000 and you forgive their note, they’ll owe taxes on this amount.

At the end of every seven years you must cancel debts.” ~ Deuteronomy 15:1-2.

Private Annuity. Do you want to help your alma mater in other ways besides paying off the entire debt for this year’s graduating class? A private annuity may be an option. It will allow you to donate appreciated property like real estate or equities in exchange for an income stream. Let’s say you own a $500,000 piece of property with a low-cost basis. If you donate the land to the school, they will send you monthly income for a certain period. In addition to the fixed income, you’ll receive a tax deduction for the fair market value of your land.

Charitable Remainder Trust. This trust, like the private annuity, works well with appreciated assets. When you transfer assets to the trust, you’ll be able to sell them and diversify your holdings while avoiding a capital gains tax. Let’s assume you own $1 million worth of Amazon stock – your only investment. After the shares are transferred to the trust, you’ll be able to sell the stock, buy new investments, receive monthly income, avoid the capital gains tax and get a tax deduction. The charity will receive your assets after you die, thus the term “remainder.”

Donor Advised Fund. Establishing a Donor Advised Fund (DAF) will allow you to contribute cash or securities to your account and then distribute your donations over time and as you see fit. If you’re not sure who should receive your gifts, this is an excellent vehicle because you can bunch, or consolidate, your donations to receive a tax deduction and defer your distributions. The contributions are irrevocable, but you’ll be able to invest the assets inside the fund allowing you to control your investments and distributions.

Direct Gift. If you know the who, what, when and why for your donation, then a direct gift makes sense. If you want to give $100,000 to your favorite charity, you can create a direct link to the institution and bypass setting up a new account, trust or foundation. You’ll be able to deduct the fair market value of your donation.

Bring the whole tithe into the storehouse, that there may be food in my house. Test me in this,” says the Lord Almighty, “and see if I will not throw open the floodgates of heaven and pour out so much blessing that there will not be room enough to store it. ~ Malachi 3:10

Mr. Smith’s gift is breathtaking and monumental. It will allow these young men to hit the ground running unencumbered by debt with an opportunity to make an impact from day one. Morehouse College has some notable alumni like Martin Luther King, Jr., Edwin Moses, Spike Lee, Samuel L. Jackson and Herman Cain. Who knows, maybe a few men from the class of ’19 will join these legendary graduates as a result of their good deeds and works.

Et Facta Est Lux (And there was light) ~ Morehouse College Motto

May 20, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

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

My Daughter

Do you give the horse its strength or clothe its neck with a flowing mane? Do you make it leap like a locust, striking terror with its proud snorting? It paws fiercely, rejoicing in its strength, and charges into the fray. It laughs at fear, afraid of nothing; it does not shy away from the sword. ~ Job 39:19-22.

My daughter left home today for her summer job as a wrangler on a Christian dude ranch. The ranch is a slice of Heaven, snuggled between several mountain peaks in Estes Park, Colorado.

My daughter started riding horses before she learned to ride a bike. My uncle, who spent his entire life working with horses, encouraged me to introduce her to another activity besides horseback riding. He was concerned about the cost and he knew it was going to be a lifelong commitment. He was right on both fronts but I’m glad I didn’t take his advice because horses have been instrumental in building her character. The confidence she earned while riding horses has been priceless. When she’s on the back of a horse she shows no fear and rides like the wind.

Ranch life is back-breaking work where wranglers rise early and stay up late. They do a thousand little things every day to make sure the horses and riders are safe. They run about 100 horses from the pasture to the barn before the sun rises.  At the barn the horses are cleaned from hoof to head and then saddled for their daily rides around the ranch or into the Rocky Mountain National Park. The horses are then moved back to the pasture after their day is done.  Moving horses between the pasture and the barn is called jingling and it’s quite a sight to see hundreds of horses running as one. Afterwards the wranglers return to the barn to put away saddles and make any necessary repairs to the property or equipment. It’s a long day, but their love of horses keeps them going.  Wranglers always finish what they start, and they take pride in their work.[1]

During the day the wranglers manage both horse and human. Each guest is assigned a horse for the week based on their ability and experience. Skill levels vary. Most riders are city slickers who might touch a horse once or twice a year. Wranglers do a great job of matching horse to rider. Horses are big animals and they must be respected. A wrong move by an inexperienced rider can bring harm to both horse and rider. Listening and watching the wranglers is important for the campers if they want to have an enjoyable vacation.

I spent many hours with my daughter at various barns mucking stalls, tacking horses, setting up barrels, moving cross rails, and tossing hay. I learned a lot about horses by watching her work. She took her time grooming her horse and planning her day before she led it into the ring. It was worth the wait as I watched her gallop on a thoroughbred as the sun was settling in for the day. She’d spend all day at the barn if I let her.

Investors can learn several things from wranglers.

Respect. The markets, like horses, are unpredictable and can change course quickly, often without notice. If you’re going to invest your life savings in the stock market, you need to pay attention to the details. It’s paramount to understand the innerworkings of the market or hire someone who does.  At one of her first horse shows, her horse got spooked and reared up. It scared me to death, but she remained poised and was able to calm her horse down. Markets will get spooked, so it is important to stay calm during the turmoil.

Plan. Wranglers plan each day. They choose the horses to ride and which trails to traverse. The weather report plays a significant part in their planning and saddle bags are packed accordingly. Before the wranglers let riders hop in the saddle, they have a long list of items that need to be completed. Before you invest, I recommend completing a plan. Which financial routes do you want to follow? What resources will you use to reach your financial goals? A financial plan can help you improve your investment experience.

Communicate. The wranglers are equipped with radios so they can communicate with each other about trail conditions, weather, riders, etc. By staying in constant contact they’re able to stay informed. Talking with your advisor on a regular basis is recommended. Communication is the key to a successful advisor-client relationship.

Adjust. Riders come in different shapes and sizes, so saddles and tack constantly need adjusting. Mountain conditions change quickly, so wranglers and riders need to be flexible. Investors need to be flexible as well and adjust their portfolios as needed. Markets are not static. Adjust accordingly. On one Sunday my daughter was riding bareback. I was sitting in a lawn chair reading a book. When the horse trotted around the turn near where I was sitting my daughter wasn’t on it. I jumped up to see her lying face down on the other side of the ring. I ran to see if she was okay. She turned over with a face full of sand and a big smile. She said, “He saw a squirrel and jumped.” She dusted herself off and got back on the horse. When the market corrects, dust yourself off and get back in the game.

Patience. Working with horses and riders requires patience. Horses have a mind of their own and, as you know, you can lead one to water, but you can’t make it drink. Dealing with inexperienced riders probably requires more patience than working with the horses. Investing for the long haul also involves patience. Creating long-term wealth takes time. Saving money monthly while reducing your expenses doesn’t create overnight riches, but it will build your net worth over time.

Courage. Wranglers are tough. It takes courage to deal with hundreds of horses, especially when the weather turns for the worst. Guiding young riders on a mountain trail in the Rockies is not for the faint of heart either. In addition, they encounter several types of wildlife – snakes, bears, or elk. Investors need courage as well, especially when stocks are falling. It’s difficult to stay focused on your investment goals when the market drops, but it’s necessary to stay the course for you to obtain your financial goals.

My daughter is a tough kid with a warm heart. A wrangler to the core. I love her dearly.

Giddy up!

There is something about the outside of a horse that is good for the inside of a (wo)man. ~ Winston Churchill

May 16, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

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

 

[1] Cowboy Ethics, James P. Owen, The Code of the West