Tag: Bitcoin

Time To Buy T-Bills?

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Stocks, Bitcoin, and NFTs, are surging. The NASDAQ is up 41% since last March, Bitcoin soared 627%, and last week, the artist Beeple sold an NFT for $69 million. The economy is opening up, stimulus checks are coming, and investors are in growth mode. If everyone is making money buying stocks and other investments, why is it time to buy T-Bills? Let’s find out.

T-Bills are the safest investment in the world, and they’re guaranteed regardless of how much money you invest. If you want safety and liquidity, look no further. However, you pay the price for allocating capital to T-Bills. The current rate for a one-month T-Bill is .03%. If you extend the maturity to one-year, the rate jumps to .09%. Relative to everything, the interest rates are anemic.

In 1981, the yield on the one-month T-Bills was 14.7%. It has since fallen 99.79%. Since 1926, they averaged 3.3% per year, so too has inflation.  After subtracting inflation, your net return is near zero.

(Chart: Macrotrends, 1-year Treasury Rate 54-year historical chart)

Berkshire Hathaway, led by Warren Buffett and Charlie Munger, owned more than $135 billion worth of T-Bills at the end of last year.[1] They use them to fund their corporate operations and make strategic acquisitions. Mr. Buffett said, “If a $100 billion deal came along that [Vice Chairman Charlie Munger] and I really liked, we’d get it done.”[2] The duo buys about $4 billion worth of government securities weekly.

If you’re still reading, here are a few reasons to buy T-Bills near historical lows while other investments perform well (and better) than short-term government bonds.

  1. If you’re anxious about rising interest rates, then T-Bills are an excellent choice. They are auctioned weekly with maturities of 4-, 8-, 13-, 26-, or 52-weeks. It’s possible to build a short-term ladder with bills expiring weekly. If interest rates rise, you’ll reinvest your proceeds at higher rates without suffering a principal loss. T-Bills have never had a year where they posted negative returns.
  2. If you’re worried about a stock market correction, T-Bills will protect a portion of your account.  Transferring 40% to bonds from an all-equity portfolio lowered your risk by 37%. T-Bills are a hedge against falling stocks because they’re negatively correlated. During the Tech Wreck in 2000, T-Bills outperformed stocks for three years in a row. When stocks fell 4.38% in 2018, T-Bills rose by 1.81%. Last March, the S&P 500 lost 12.35%, T-Bills remained firm at .12%.[3]
  3. If you hold a significant cash position at your bank, T-Bills can offer you more safety. T-Bills are insured dollar for dollar, regardless of the amount. Rather than transferring money between several banks to make sure you qualify for FDIC insurance, you can purchase one T-Bill.
  4. If you need to buy something in a year or less, T-Bills offer liquidity not found in other fixed-income investments. Stocks are volatile and can suffer significant losses. If you’re going to buy a new home for $1 million, purchase a T-Bill to guarantee that the funds will be there when you need them most.  

T-Bills are purchased for safety, not for growth. You will not create generational wealth owning short-term government investments. It’s not possible. Low rates and inflation are a poor mixture for growth. However, if you need safe investments with a hedge, the T-Bill is your answer.

Bye, bye, and buy bonds.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” ~ Paul Samuelson

March 15, 2021

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.berkshirehathaway.com/2020ar/2020ar.pdf, accessed March 15, 2021

[2] https://www.cnbc.com/2018/05/07/warren-buffett-if-a-100-billion-deal-that-we-like-came-along-wed-get-it-done.html, May 7, 2018, Fred Imbert

[3] Dimensional Funds Returns Web – 1926 to 2021.

Rate of Return

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Do you know the rate of return on your investments? Have you ever calculated your total return? In my experience, most investors don’t know what they earn on their money. Of course, I often hear about winning stock trades – never the losers, nor do people tell me how much they allocate to their trades. A 10% gain on a million-dollar investment is more impactful than one where you only commit $100.

I recently watched a Bitcoin evangelical promote the compounding rate of return for the popular digital currency.  He was touting annual gains of 200% to the host and millions of TV viewers as if it was normal. At 200%, a $100,000 investment will be worth $5.9 billion (with a B) in ten years! If you earned 200% for twenty years, you’d be worth $348 trillion (with a T) – totally normal. After thirty years: $20,589,113,209,464,900,000, or $20 quintillion. Regulators would throw me in jail if I touted annual returns of 200%.

Rates of return matter, and being aware of what you earn is essential. Your money doubles every ten years at 7%. If you make less than 3% per year, inflation will wipe out your gains. Risk and reward are connected. A portfolio of stocks earns more than a portfolio of bonds, but the risk level is higher. The 100-year return for stocks has been 10%, but there have been several years of negative performance and numerous market crashes. During the same time frame, the one-month US Treasury Bill never lost money – not one negative year, but it generated a paltry average annual return of 3.3%.[1] Since 2005, the S&P 500 is up 224%, while short-term bonds have increased by 5.75%. The S&P had several corrections, including a 51% crash in 2008 and a 30% decline last year; bonds barely budged.

A financial plan can give you a glimpse of your future. Most planners can review your performance and risk level to determine how much of both are needed to reach your goals. If you’re far from your target, owning more stocks is recommended. A sizable allocation to equities will allow you to generate higher rates of return. If you have more than you need, allocating a bigger percentage to bonds can help maintain your wealth.

A balanced portfolio of 60% stocks, 40% bonds produced an average annual return of 9% since 1926.[2] It lost 44.5% in 1931, but it rebounded 82% in 1932, and 36% of the time, it lost money. However, the portfolio never lost money on rolling 10-, 15-, and 20-year periods.[3]

Balancing risk and return is part art and science. Allocating too little to stocks can negatively impact your wealth. If you’re young, stocks will benefit from your time horizon. If you’re retired, investing in stocks can help you maintain your purchasing power. Investing too conservatively at any age can have dire consequences to your wealth.

My best investment, so far, has been Amazon. I bought a few shares for my daughter’s education account in 2005, and it has generated an average annual return of 31%, or 6,647%. It’s not 200%, but it has helped us pay for college.

Happy Investing!

“In investing, what is comfortable is rarely profitable.” — Robert Arnott

March 10, 2021

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 Fund Advisors 2020 Matrix Book

[2] Dimensional Fund Advisors Returns Web – 1926 to 2021.

[3] Ibid

Buy Bitcoin?

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Should you buy Bitcoin or other cryptocurrencies? Maybe. Bitcoin has performed well this year, up 107%. Though it has done well, it still hasn’t eclipsed its all-time high set in 2017. If you want to buy Bitcoin, I would consider it an alternative investment, not as a substitute for cash or a money market fund.  

Global currencies from developed countries are relatively stable, and a consistent store of value. The US Dollar, Euro, Pound, Yen, and Canadian Dollar fall into this category. Bitcoin may eventually become a stable currency, but it’s not there yet. In 2018 it fell 81%, and in 2019 it dropped 55% before bottoming in March of this year.

If Bitcoin is an alternative asset, then I’d recommend allocating no more than 3% to 5% of your investable assets to this class. For example, if you have $1 million in assets, an investment of $30,000 to $50,000 is appropriate.

How do you buy and sell cryptocurrencies? If you want to trade Bitcoin or other cryptocurrencies, I would recommend opening an account on Coinbase. On their site, you can trade Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. According to their website, they’ve exchanged more than $150 billion worth of cryptocurrencies across 102 countries through 30 million customers. If my math is correct, each customer has risked about $5,000.[1]

Bitcoin is a digital asset tracked and stored on the blockchain. Bitcoin is the original cryptocurrency, and there is only 21 million Bitcoin. I’m sure I’m missing something about supply and demand, but I have always wondered why the price isn’t higher or why no one tries to corner the market. Bitcoin trades for $15,127, giving it a market cap of $317 billion. For example, Apple currently has 17.4 billion shares outstanding, and it’s selling for $119 per share. If Apple only had 21 million shares, it would trade for $96,523. In the 1980s, the Hunt Brothers tried to corner the silver market[2]. The price of silver jumped from about $4 an ounce to a high of $48.70 for a gain of 1,117%. Silver would eventually fall to under $4 an ounce after their coup d’état failed.

Bitcoin is making its way to main street as Square and PayPal allow customers to buy and sell it on their platforms. Companies like Microsoft, Home Depot and Starbucks now accept cryptocurrency.

Do you need to own Bitcoin to create wealth? I don’t think so. Do you own a Van Gogh, da Vinci, or Picasso painting? Do you own thousands of acres of timberland? The Hope Diamond? A 1962 Ferrari 250 GTO? Drawers of Patek Philippe watches? Of course, these are extreme examples, but you’ll be fine without owning Bitcoin if you want to create generational wealth. If you’re going to use it to buy goods and services, that’s another story.

Here are a few links if you want to learn more about Bitcoin.

Happy mining!

We have elected to put our money and faith in a mathematical framework that is free of politics and human error. ~ Tyler Winklevoss

November 11, 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.

This blog is not an offer to buy and sell Bitcoin. I do not own any cryptocurrencies because I don’t understand them as well as I should. If you want to trade this asset class, do your homework.

[1] https://www.coinbase.com/, website accessed 11/11/20

[2] https://www.investopedia.com/articles/optioninvestor/09/silver-thursday-hunt-brothers.asp, Andrew Beattie, June 25, 2019.