The Miser

The Miser is a classic Aesop Fable. It’s a story about a man who buries his gold under a rock. He visits his gold stash so often that a thief follows him and steals it. The miser is distraught when he realizes it’s gone, though he had no plans to use the gold to buy things. A lot of us are probably like the miser in the story. We check our investments daily to make sure they are safe and sound, but we don’t intend on using them to purchase anything. We’re happy when our balances rise and sad when they fall.

Money is a useful asset, intended to buy goods and services. It’s the heartbeat of commerce. But, some investors are reluctant to spend for fear of running out of money.  Since March, investors have poured $3.6 billion into savings accounts and money market funds. While it’s prudent to save money for the future, hoarding it today does not benefit anyone.

I’ve completed more than 100 financial plans over the past five years, and one of the most common fears is running out of money in retirement, a valid concern. However, this fear should not stop you from living your life today. If you don’t plan on spending your money to live, your no worse than the miser in the story. And, you can’t take it with you once you’re dead.

Here are a few ideas to help you with your spending.

  • Complete a financial plan. Your plan will guide your spending and give you projections for your assets. Once you see your spending plan on paper, you may be more comfortable in tapping your nest egg, and if you’re not pleased with the results, it can be adjusted to meet your needs.
  • Spend on experiences. If you’re reluctant to buy things, spend your money on experiences. Is a post-COVID trip in order? How about purchasing a vacation home so you and your family can create lasting memories? According to Momentum Worldwide, 76% of consumers prefer to spend money on experiences than material items.[1] My family and I enjoy visiting National Parks in the summer and skiing in the winter; it has been money well spent. My grandparents owned a vacation home in Laguna Beach, and I have fond memories of visiting it often.
  • Donate to your favorite charity. Despite a roaring stock market and robust real estate returns, people are hurting. Recently in Dallas, more than 6,000 cars and 25,000 people waited in line to receive food from local food banks.[2] Donating to your local food bank or other charities will help those in need, and it will help you as well. The IRS allows you to send up to $100,000 from your IRA to a certified charity through a Qualified Charitable Donation (QCD). If you own stock in a taxable account that has appreciated, consider donating it directly to a charity. You can write off the fair market value, and your charity can sell it free of taxation and use the proceeds to fund their operation.
  • Help the next generation. You can give away $15,000 per person per year, and your lifetime gift tax exclusion is $11.7 million (2021). If you give money away while living, it will allow you to witness the beauty of helping others while reducing your taxable estate. The government is giving you a gift to give money away, so take advantage of their generosity.
  • Donate now, give later. A donor-advised fund allows you to make a considerable contribution today and defer distributions to a later date. Your irrevocable gift is deductible in the year you make it even if you do not distribute any funds. The money can be invested for growth or safety, potentially allowing you to give more money away as your investments grow. For example, if you contribute $100,000 to a DAF today, you’ll be able to write it off your taxes regardless if you distribute any funds or not. Here is a link to Schwab’s Donor-Advised Fund: https://www.schwabcharitable.org/donor-advised-funds
  • Spend your gains. A balanced portfolio consisting of 60% stocks and 40% bonds is up 10.75% for the year.[3] If you invested $1 million on January 1, your gain would be $107,500, so you could spend this amount without invading your principal.
  • Spend your income. A portfolio of dividend-paying stocks or income-producing bonds is an excellent way to spend money without touching the principal portion of your account. If your account generates 3% in income, you can withdrawal $30,000 from a $1 million portfolio.

It’s a delicate balance between spending money today or saving it for the future, but it’s possible, especially with proper planning.  Also, tomorrow might not come, so spending money while you’re happy and healthy is recommended.

Happy Spending!

Here is a link to Aesop’s Miser Fable: http://www.read.gov/aesop/112.html

Spending money is much more difficult than making money. ~ Jack Ma

December 3, 2020

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

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


[1] https://www.prnewswire.com/news-releases/76-of-consumers-prefer-to-spend-on-experiences-than-on-material-items-new-study-finds-300937663.html, website accessed December 2, 2020

[2] https://www.cbsnews.com/news/thousands-line-up-in-dallas-texas-to-receive-food-ahead-of-thanksgiving-food-bank-donation/, by Danielle Garrand, November 16,2020.

[3] YCharts – 1/1/2020 to 12/03/2020, PWM ETF Moderate portfolio

The Hare, The Tortoise, & Stocks

The Hare and the Tortoise is a classic Aesop fable. A story we know well.  The hare mockingly asking the tortoise, “Do you ever get anywhere?” Of course, we know how the story ends. The tortoise “kept going slowly but steadily, and, after a time, passed the place where the Hare was sleeping.” Practicing a life of slow and steady is harder than it looks. We are an impatient nation addicted to getting our way as quickly as possible.

I recently lost a client who wanted to arrive at the finish line faster than scheduled. He mentioned a relative who was investing in growth stocks and generating returns of “20% to 30% or more.” Since the market low on March 23, the NASDAQ has risen 71%, and stocks like Shopify and The Trade Desk have risen more than 320%. The recent pandemic has turned Robinhood traders into stars, and one celebrity repeatedly mocks Warren Buffett and has said, “Trading is easy.”

The curious thing about my call with my former client is that it resembled one I had with another client in December 1999. At the time, the NASDAQ had risen 53% in two months as investors speculated on internet and dot com stocks. He, too, wanted to grow his account faster. He was not satisfied with his returns, and he felt like he was missing his chance to strike it rich. The NASDAQ would rise another 24% as it reached a peak in March 2000. The NASDAQ would fall 78% before it hit rock bottom in December 2002. If you invested at the market top in 2000, you had to wait sixteen years before the index eclipsed its previous high.

At times, I think it’s easier to make 50%, 100%, or more in short-term trading bursts than earn 8% for 10, 20, or 30 years. It’s possible to catch lightning in a bottle, but the key to creating generational wealth is how you react after a market crash. How many investors in 1999 remained invested for sixteen years to recover their costs or buy stocks at low prices? My guess, not many.

When the market corrects, the slow and steady crowd takes over, systematically investing while following their plan. Warren Buffett said, “The stock market is a device for transferring money from the impatient to the patient.”

The 100 year average for stocks has been 10%, and it’s been 5.6% for long-term bonds. Since 1926, a portfolio consisting of 50% stocks, 50% bonds generated an average annual return of 8.55%, and it has made money 79% of the time, which means 21% of the time it lost money.[1] And, in some years it lost a lot. In 1931, the portfolio lost 38%; from 1984 to 1987, it dropped 19.8%. How you manage your investments and emotions in down years determines your wealth in up years.

A 50/50 portfolio has performed well for 1, 3, 5, and 10-years, averaging 12.18%, 12.10%, 10.54%, and 10.73%, respectively.[2] The 20-year average annual return has been 7.87%. You don’t need to make substantial gains to achieve your goals, though it would be nice. If you earn 8% per year, you can double your money every nine years.

I started my investment career in May 1989, and since then, the NASDAQ, Dow Jones, and the S&P 500 are up considerably, rising 2,660%, 1,130%, and 1,070%, respectively. However, during the past thirty years, the market has fallen several times. The NASDAQ fell 78% from 2000 to 2002. In 2008 and 2009, the S&P 500 dropped 48%. In December 2018, the Dow Jones pulled back 18.15%. This year, the three indices fell an average of 33.5%.  If you invested in each index equally for the past three decades, your average annual return was 8.94% before dividends. A $10,000 investment is now worth $130,500.

Individuals who complete a financial plan are likely to stay invested through good markets and bad. If you don’t have a plan, you may panic and sell your stocks when times are tough. In March and April, we fielded several calls from clients who wanted guidance on how to handle the sell-off. We reviewed their plans and told them to remain invested because the market correction did not impact their financial goals.

The hare lost the race because he was impatient and overconfident. If he had a plan and followed it, he would have beaten the tortoise by a mile, and Aesop would not have written his famous fable.

The race is not always to the swift. ~ Aesop Fable

November 13, 2020

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

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


[1] Dimensional Funds Returns Web 

[2] Ibid

The Crow and the Pitcher

The Crow and the Pitcher is a famous Aesop fable. The crow is thirsty and stumbles across a pitcher of water, but he can’t reach the water because the neck of the pitcher is too narrow. The crow picks up small rocks and pebbles to drop them into the pitcher and raise the water level. His plan works, and he’s able to get his drink.

As investors, we can learn much from the action of the crow. If we invest a little money systematically, it will eventually grow.

Investing $100 per month into Vanguard’s S&P 500 index fund grew substantially over time. Here’s how much the account balance was worth after each decade.[1]

  • 10 years = $23,812.
  • 20 years = $64,815.
  • 30 years = $180,228.
  • 40 years = $673,745.

Ignore the market turbulence, invest always, focus on your long-term goals, and good things will happen.

A bird is three things: feathers, flight and song, and feathers are the least of these. ~ Marjorie Allen Seiffert

August 27, 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. 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.

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. Options involve risk and aren’t suitable for every investor.

 

Illustration credit = Campwillowlake

 

[1] Morningstar Office Hypothetical. VFINX, month end July 31, 2019.

The Hare and the Tortoise.

The Hare and the Tortoise is a classic Aesop Fable about an over confident hare and an unassuming tortoise who engage each other in a foot race.  The fleet-footed hare is so assured of his abilities to win the race he decides to take a nap on the race route while the lowly tortoise keeps on walking.  When the hare finally rouses from his slumber he realizes the tortoise is about to win the race and despite the hare’s best efforts to catch the tortoise he falls short and loses the race.

In the sixth grade, I wanted to run on the 4 x 100 relay team for our elementary school track team but I was an extremely slow runner.  I knew I wouldn’t make the A team so I convinced the coach to add a C team just in case all the boys on the A and B teams got hurt before the meet.  He humored me and added a third relay team.  As I got older I started running marathons.  In a marathon, the key to a successful race is to stay focused on the pace and not worry about the other runners especially during the early part of the race.  I knew If I stayed on my pace I’d eventually catch more runners just like the tortoise.

During a bull market, investors get antsy because several investments appear to be doing better than their existing holdings so they want to abandon their plan, sell their investments and buy the high fliers.

I did some research on a high flier portfolio compared to a basket of low cost, index funds and here is what I found.

This high flier portfolio generated a 1-year return of 27.5%, a 5-year return of 14.77% and a 10-year return of 5.84%.[1]  This portfolio consisted of the following active mutual funds:

CGMIX – CGM Focus

KSCOX – Kinetics Small Cap Opportunities

LMNOX – Miller Opportunity

OAKMX – Oakmark Investor

DEMIX – Delaware Emerging Markets

LSIGX – Loomis Sayles Investment Grade Fixed Income

The low-cost portfolio generated a 1-year return of 15.37%, a 5-year return of 11.57% and a 10-year return of 6.15%.[2]  This portfolio consisted of the following mutual funds:

DFEOX – DFA US Core Equity 1

DFQTX – DFA US Core Equity 2

DFSTX – DFA US Small Cap

DFIEX – DFA International Core Equity

DFCEX – DFA Emerging Markets Core

DFIGX – DFA Intermediate Government Fund

In the end, the low-cost portfolio caught and passed the high-flying portfolio.  The high-flying portfolio was also weighed down with higher fees.  The weighted average fee for the active portfolio is 1.12% while the fee for the low-cost portfolio is .28%.

The urge to abandon your long-term plan and chase short term gains may be high but I caution you to employ this tactic.   Your financial plan coupled with a low cost, balanced portfolio will help you create generational wealth.

But if we hope for what we do not see, we wait for it with patience. ~ Romans 8:25 

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.   For more information on financial planning and investment management, please visit www.parrottwealth.com

September 27, 2017

Note:  Your returns may differ than those posted in this blog.  Past performance is not an indicator of future performance.

[1] Morningstar Office Hypothetical Tool.

[2] Ibid.