A New Year

2018 was less than kind to investors as all major asset classes finished in negative territory. Cash was the best performing asset for the first time since 1994 and only the 10th time since 1926.

Diversification is still vital for investors to obtain and maintain wealth. A mix of stocks, bonds and cash based on your goals and risk tolerance is recommended. In a “normal” market stocks outperform bonds and cash. Stocks have risen about 75% of the time over the past 100 years, but, on occasion, they drop in value like they did last year.

Investors question the wisdom of owning bonds and cash during a rising market. From March 9, 2009 to October 1, 2018, the market rose 307% or 15.7% per year! It was a great bull run. When stocks are rising 15% per year who wants to own bonds paying 2%? But when stocks fall, bonds don’t look so bad. During the 4th quarter the Dow Jones fell 12.4% while long-term bonds rose 4.6%.

Rather than trying to time the market and move in and out of stocks with precision, focus on your goals and asset allocation. Here are a few suggestions to get you started.

  • Write down your goals. What do you want to achieve in 2019 – financially, personally, professionally? If you write down your dreams, they become goals.
  • Do you have any immediate financial needs? If so, attack these items first. Don’t let them fester. It’s not possible to pursue your financial dreams if something is holding you back. A boat can’t leave the harbor if it’s tied to a dock.
  • Create a financial plan. Your plan will help you quantify and prioritize your goals. It will also determine your asset allocation and risk tolerance.
  • Develop a spending plan. Do you know where your money is going? A budget will help you create wealth over time by redirecting your spending to savings.
  • Diversify your assets. As I mentioned, stocks, bonds and cash are essential to your long-term investment success. Adding international and alternative investments to your portfolio will also help your results.
  • Rebalance your accounts. January is a great time to rebalance your accounts and return them to your original asset allocation. If you didn’t make any changes to your accounts last year, it’s possible your equity exposure is below your target allocation because of the market drop.
  • Payoff debt. Do you have car loans, credit card debt, student loans or a mortgage? If you have assets to pay off these debts, do it today! Reducing your debt level is freeing financially and emotionally. In addition, you’ll save thousands of dollars in interest payments over the life of your loan. Let’s say you owe $30,000 on a car loan with a 4% interest rate. If you paid it off, you’d eliminate your $552 monthly payment and save over $3,100 in interest payments. Can you find a better way to spend $552 per month?
  • Establish an emergency fund. The goal is to reach three to six months of expenses in short-term savings like CD’s or T-Bills. For example, if your monthly expenses are $10,000, then try to save $30,000 to $60,000. I’ve run several marathons and the hardest part has always been the first day of training. Once I started, however, the training became easier.
  • Give money to groups or organizations you support. Giving will loosen your grip on your money, help others, and make you happier.
  • Health is wealth. January is a great time to start working out. Invest some time in walking, hiking, biking, running, climbing, skiing, swimming, lifting, or anything that gets you moving.

Focus on the future. Don’t let last year’s lousy market hold you back. The Baylor Bears won 1 football game in 2017 finishing with a dismal record of 1-11. However, they didn’t let the disappointment of their horrible season ruin their plans for 2018. Rather, they trained with a process and a purpose, concentrating on those items they could control. How did they do in 2018? They won 7 games and beat Vanderbilt in the Texas Bowl – quite a turnaround.

A new year gives you 365 new opportunities – so get going!

Let your eyes look straight ahead; fix your gaze directly before you. ~ Proverbs 4:25

January 2, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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 to help our clients pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.


Diversification or concentration? To create wealth, concentrate; To preserve it, diversify. A concentrated portfolio can produce huge gains, if you own the right stocks. Of course, if you own the wrong ones, your wealth will be wiped out. Buying the right sector, at the right time, at the right price requires multiple factors, most of which are out of your control. The primary ingredient for consistently picking a winning stock is luck.

Let’s look at the best performing sectors for the last 10 years and the returns they generated.

2008: Long term bonds = 33.92%

2009: Emerging Markets = 76.28%

2010: Real Estate = 28.37%

2011: Long term bonds = 33.96%

2012: International Small Cap Stocks = 21.28%

2013: U.S. Small Cap Stocks = 41.32%

2014: Real Estate = 30.36%

2015: International Small Cap Stocks = 9.10%

2016: U.S. Small Cap Stocks = 26.61%

2017: International Small Cap Stocks = 32.73%

2018 U.S. Small Cap Stocks = 14.47%

It might appear easy to pick the winner in advance, but this is not the case. For example, the emerging markets rose 76% in 2009, but lost 51% in 2008. How many investors had the courage or wisdom to invest in emerging markets in 2008? If they did, they were rewarded handsomely one year later.

International small-cap companies have been the best performing sector for 3 out of the last 10 years, so it would make sense to allocate some money to this sector. However, it does come with risks because it generated negative returns in 2008, 2011, and 2014.

Warren Buffett prefers a concentrated portfolio and it doesn’t pay to argue with the greatest investor of all time. Mr. Buffett concentrates his wealth in Berkshire Hathaway stock. Is Berkshire a concentrated or diversified holding?

Let’s look at some of the holdings listed in the 2017 Berkshire Hathaway annual report.[1] Berkshire owned the following publicly traded companies: American Express, Apple, Bank of America, Bank of New York, BYD Company, Charter Communications, Coca-Cola, Delta Airlines, General Motors, Goldman Sachs, Moody’s, Phillips 66, Southwest Airlines, U.S. Bancorp and Wells Fargo.

In addition, Berkshire also owned several privately held companies, including: Acme Brick, Ben Bridge Jeweler, Benjamin Moore, Brooks, Borsheim Jewelry, Burlington Northern, Clayton Homes, Duracell, FlightSafety International, Fruit of the Loom, GEICO, General Re, Helzberg Diamonds, Johns Manville, Jordan’s Furniture, Justin Brands, Kraft Heinz, Lubrizol Corporation, Marmon Holdings, McLane Company, MidAmerican Energy, MiTek Industries, NetJets, Nebraska Furniture Mart, Oriental Trading Company, Pampered Chef, Precision Castparts, Precision Steel Warehouse, Scott Fetzer Companies, See’s Candies, Shaw Industries, and Star Furniture.

Is his portfolio concentrated or diversified? I’ll let you come to your own conclusion, but I think it’s the later.

A balanced portfolio of 60% stocks, 40% bonds generated a 6.93% return for the past 10 years – including the sharp drop in 2008. A million-dollar investment on 8/1/2008 is worth $1.97 million today.[2]

It would be great, and financially rewarding, to always invest in the best investment but this is not possible. For most investors, a diversified portfolio of low-cost mutual funds is recommended. Your portfolio will benefit from the long-term growth generated from global markets.

I am not saying this because I am in need, for I have learned to be content whatever the circumstance. ~ Philippians 4:11


Bill Parrott is the President and CEO of Parrott Wealth Management firm 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.


[1] http://www.berkshirehathaway.com/subs/sublinks.html

[2] Morningstar Office Hypothetical – 8/1/2008 – 8/31/2018. IVV, IJR, EEM, EFA, AGG. Returns are gross of fees and taxes.

No. How Can I Help You?

Are customers always right?   Employees who work in the retail sector are trained to say “yes” to client requests and that they’re always right.  They sell the client what they want, not what they need. It’s hard to find a salesperson who says “no” to client requests.

If I order a triple bacon cheeseburger with guacamole, chili-cheese fries, and a chocolate shake the clerk is going to take my order, deliver my food, and move on to the next customer.  He doesn’t question my order or the ramifications it will have on my health.

My role as an advisor, however, is to recommend what clients need, not what they want. This means I regularly say “no” to client requests especially when it’s not in their best interest.  My goal is to make sure they follow their financial plan.  I want to say “yes”; I want to be the good guy but not at the expense of their financial wellbeing.

In December of 1999 I met with a client who wanted to know why he didn’t have a larger exposure to high-flying technology and internet stocks.  He was questioning his allocation to international, real-estate and bond investments.  He wanted to sell these holdings to buy NASDAQ traded stocks.  I told him “no” because of their rich valuations and that they didn’t fit into his long-range plans.  He didn’t like my answer, so he asked the branch manager to transfer his account to another broker.  A few months later the NASDAQ peaked and proceeded to fall 70%.

Today, investors are once again questioning the wisdom of diversification as bonds, real-estate investment trusts and value stocks underperform growth stocks like Facebook, Amazon, Netflix and Google (Alphabet).  Investors are ready to abandon their asset allocation models to chase returns. Of course, the path of least resistance would be for me to cave into these requests and give them what they want, but is this prudent? Let’s look at a few examples.

  1. From October of 1989 to December of 2016 stocks averaged 9.38% per year. If an investor missed the 25 best days during this stretch his returned dropped to 3.98%.[1]
  2. In 2008 the S&P 500 fell 37% and long-term government bonds rose 25.9%.[2]
  3. From 1994 to 2016 stocks generated an average annual return of 7.3%. If an investor didn’t own the top 25% of performers each year, he lost an average of 5.2% per year.[3]
  4. In 2015, Denmark was the best performing stock market in the world and Canada was the worst. A year later they switched places.  Canada was first; Denmark was last.[4]
  5. International stocks returned a paltry 1.6% in 2016 but gained 25% in 2017.[5]
  6. In Barron’s 2017 Roundtable one prediction called for interest rates to rise and stocks to fall.[6] What happened?  Rates, stocks soared.

It would be nice to own investments that only went up, but this isn’t possible.  Markets rise and fall. Sectors move in and out of favor.  After all, if all your investments went up at the same time you wouldn’t be diversified!

A wise strategy is to follow your financial plan, diversify your investments and rebalance them annually.

“Never ask a barber if you need a haircut.” ~ Warren Buffett

But about that day or hour no one knows, not even the angels in heaven, nor the Son, but only the Father. ~ Matthew 24:36

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.


Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.  Photo credit = lisafx



[1] DFA –  Investor Discipline – Reacting Can Hurt Performance

[2] 2016 – Dimensional Fund Advisors Matrix Book

[3] DFA –  Diversification May Prevent You from Missing Opportunity

[4] 2016-Dimensional Fund Advisors Matrix Book

[5] http://awealthofcommonsense.com/2018/01/updating-my-favorite-performance-chart-for-2017/, Ben Carlson, 1/14/2018

[6] https://www.barrons.com/articles/stocks-could-post-limited-gains-in-2017-as-yields-rise-1484376687, Laurin R. Rublin, 1/14/17.