My Gym

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

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

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

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

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

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

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

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

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

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

January 28, 2020

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

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

 

 

 

 

Ice Cream and Investing

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

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

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

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

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

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

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

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

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

January 7, 2020

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

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

 

 

 

 

 

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

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

If, Then

In college, I learned the if, then command while studying the BASIC computer language. BASIC is a conditional language that relied on the if command. If X is true, then Y is false, and so.

Financial planners rely on if, then statements regularly. It’s common for planners to include a statement like, “If you invested X amount in stock Y, then you’d have Z dollars today.” The examples show investors the advantage of long-term investing, despite the stock market’s gyrations. Some of the examples are outrageous, but we still use them anyway. For example, if you invested $100,000 in the stock market in 1926, you’d be worth more than $700 million today. This example is ridiculous on many levels. First, $100,000 in 1926 is equivalent to $1.5 million today. Second, would you have held on to your investment through the Great Depression? Doubtful. Third, it assumes you didn’t pay any taxes on your investment or spend any money for 93 years.

Despite the crazy claims, advisors use these examples religiously, including me.

Here are a few if, then statements.

If you invested $100,000 in Amazon in 1997, you’d have $92 million today.[1]

If you invested $92 million in Enron, you’d have zero dollars today.

If you sold stocks last December because the market was down 15%, you missed a 36% return in the S&P 500 this year.

If you sold bonds last year because you expected the Federal Reserve to raise interest rates this year, you missed a 13.7% return in long-term bonds through the iShares 20+ Year Treasury Bond ETF (TLT).

If you create a budget, it will help you with your spending.

If you spend less than you earn, you’ll save money.

If you save money, your assets will grow.

If you try to keep up with the Joneses, you’ll end up in the poor house.

If you make a Will or a Trust, you’ll protect your family.

If you own life insurance, you’ll also protect your family.

If you own long-term care insurance, you’ll protect your assets if you move into an assisted living facility.

If you participate in a high deductible health insurance program, consider opening a Health Savings Account to offset the cost of healthcare.

If you’re going to live in your city for five years or more, buy a home.

If you have a mortgage, add a few dollars to your monthly payment so you can pay it off early.

If you move often, rent a home.

If you have children, invest early and often so you can pay for some, if not all, of their college education.

If you work for a company that offers a retirement plan, contribute as much as possible so you can eventually enjoy your retirement.

If you have financial assets to meet your spending needs, defer your Social Security benefits until age 70 so you can qualify for the maximum benefit allowed.

If you have any assets, consider donating to a charity or causes you and your family support.

If you own an IRA or workplace retirement plan, check your beneficiaries to make sure they’re current.

If you complete a financial plan, you’ll have three times more assets than those people who do little or no planning.[2]

If you work with a Certified Financial Planner®, they will put your interest first.

If you finished reading this blog, thank you and Merry Christmas!

“First, solve the problem. Then, write the code.” – John Johnson

December 17, 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. 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] Morningstar Office Hypothetical

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

Baylor Bears Football

The Baylor Bears are enjoying an excellent football season. They currently rank 9th in the polls after trouncing The University of Texas. With a record of 10-1, they’re headed to the Big 12 Championship Game for the first time in school history for a rematch against Oklahoma. Hopefully, they’ll be able to avenge their gut-wrenching loss. If they win the rest of their games and get a little help from other teams, they may find themselves in the college football playoffs.

The turnaround is astonishing, considering the team only won one game in 2017. The 2017 season was Matt Rhule’s first at Baylor. His first job was to convince the young men on his team that they were winners despite the media saying otherwise. His goal is to develop young men and recruit new players to buy into his system.  At his introductory presser, he said, “If you come to Baylor and you come to play for me, that you’re going to get loved and you’re going to get developed each and every day because that’s hard. That’s not easy. Coaches say that but they don’t always want to do that. But that’s all that we did at Temple. That’s all we’re going to do at Baylor because that’s our purpose, to spend all of our time developing our players.”[1]

The Bears were on the brink of receiving the death penalty from the NCAA before Coach Rhule arrived. In addition to replacing their former coach, Baylor also hired a new university president and an athletic director.

When Coach Rhule took over the football program, he only had 45 scholarship players on his roster out of a possible 85, so he had some work to do to convince high school players to attend Baylor.[2] Coach Rhule had seen this picture before as the head coach for the Temple Owls. In 2013 his team won 2 games and lost 10. In 2015 the Owls won 10 games for the first time since 1979. The Owls aren’t known for football, but they ranked in the top 25 during Coach Rhule’s final two seasons with the team.

Coach Rhule has a vision, plan, and a process for turning around football programs in need. He trusts his process and so do the players.  “That’s what my whole message to our players is,” Matt Rhule said. “You’ve done this because of your process, this didn’t happen tonight, it happened every morning over the last two years.”[3]

Webster’s dictionary defines the process as “a natural phenomenon marked by gradual changes that lead toward a particular result.” Gradual changes. Success at any level takes time.

What can you learn from Coach Rhule’s turnaround?

You need a plan that captures your vision and gives you a process for investment success. If your investment process works, stay with it regardless of your short-term results.  When returns are lackluster, it’s easy to ditch your plan and start over. Investors who don’t have an investment plan usually chase returns and make irrational decisions. This strategy is not a good long-term solution for creating wealth. In December 2018, investors withdrew $183 billion in mutual fund assets as the S&P 500 fell 15.7%. In January 2019, they added $23 billion as the stock market rose by 15%. Investors were reacting, not investing. When adversity strikes, your plan and process will keep you in the game.

You need goals. A financial plan will help guide you towards your investment destination. It will be your playbook for financial success. Coach Rhule and other successful coaches have a plan for everything – practices, games, travel, meals, etc. He leaves nothing to chance, and he focuses on what he can control. He can’t control the outcome of the game, nor can you control the direction of the stock market. Focus on your plan and the things you can control, like savings and spending.

Coach Rhule is not alone. He has a team of coaches, assistants, and other personnel helping his team achieve their goals. Surrounding yourself with a group of advisors will pay dividends. Relying on a financial planner, investment professional, attorney, and CPA will help you fortify your foundation.

Last, celebrate your success. The Baylor Bears are having fun and enjoying their season. It’s been a long-time coming for the players and their fans; both are enjoying the ride. You must enjoy your success, as well. It’s okay to sell a few of your winners and spend the money on yourself or loved ones.

There is still much work for Coach Rhule and Baylor Bears to do, but so far, so good!

Sic ‘em Bears!

November 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. 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://sicem365.com/s/560/top-10-quotes-from-matt-rhules-introductory-presser, by Baylor Football, 12/2/2106

[2] https://www.espn.com/college-football/story/_/id/27969408/how-matt-rhule-charlie-brewer-rebuilt-baylor-back-big-12-contender, by Sam Khan, Jr., 10/31/2019

[3] https://www.fox44news.com/sports/matt-rhules-motto-trust-the-process-comes-to-fruition-for-baylor-football/, by Matt Roberts, 11/24/2019

Full Stop

Full stop. The end. Period. No more. No Mas. I’ve noticed lately that politicians, commentators, and other public figures have been using the term “full stop.” I guess they want to punctuate their point, so the viewer or reader knows they’ve stated their position, and there will be no more discussing the issue. They’re moving on to the next item.

On November 25, 1980, Roberto Duran was fighting Sugar Ray Leonard. During the fight, Mr. Duran raised his arms and said, “No Mas.” He had enough and didn’t want to finish the fight.[1] He was done – a stunner for the boxing world.

According to Webster’s Dictionary, full stop means period, and it was first used in 1643, and the origin is “chiefly British.”

The financial planning and investment management industry has their version of full stop items where no more explanation is needed. Here’s a shortlist.

  • Individuals who complete a financial plan have three times (3X) the assets of those individuals who do little or no planning.[2]
  • Stocks outperform bonds. The 92-year average annual return for common stocks has been 10%, while long-term government bonds returned 5.5%. A $1 investment in large-company stocks is now worth $7,0257, while $1 invested in bonds is worth $142.[3]
  • Small-company stocks outperform large-company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.1% from 1928 to 2018. A $1 investment is now worth $72,335. The Dimensional Large-Cap Value Index averaged 11%. A $1 investment in this large-cap index is now worth $13,442.[4]
  • Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% is attributed to market timing and investment selection.[5]
  • Passive index investing is better than active stock picking. The Standard & Poor’s study of passive v. active reveals that over a 15-year period, 95% of active fund managers fail to outperform their benchmark. The data is similar for 1, 3, 5, and 10 years.[6]
  • Lower fees are better than higher fees. Less is more.
  • Working with an investment advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[7] An advisor can help with financial planning, estate planning, investment planning, charitable planning, and much more.

Full Stop.

The grass withers, the flower fades, but the word of our God will stand forever. ~ Isaiah 40:8

October 10, 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. 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://en.wikipedia.org/wiki/Sugar_Ray_Leonard_vs._Roberto_Dur%C3%A1n_II, Website accessed October 10, 2019

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

[3] Dimensional Funds 2019 Matrix Book.

[4] Ibid.

[5] 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.

[6] https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

[7] https://www.vanguard.com/pdf/ISGQVAA.pdf

Yard Sales and Investing

Twice a year, my neighborhood holds a yard sale. It’s well advertised, so people come from all over town to hunt for trinkets and treasures. The buyers arrive with a plan and a purpose.

The people who visit our neighborhood are seasoned yard sale shoppers. Arriving in trucks with trailers, they scour our streets looking for bargains. Most were looking for clothes or small household items. I had several drive buys, but nothing the shoppers wanted. I guess they didn’t need tennis rackets or baseball mitts.

One shopper had a trailer full of used equipment like bikes and lawnmowers. The items he found needed repair, and I’m sure he’ll fix them up to resale them at a higher price. His specialty appeared to be items that were broken or needed a little TLC. One man’s trash is another man’s treasure.

In addition to being value shoppers, the buyers haggled for lower prices. If it cost $10, they’d offer $5. If the seller didn’t budge, the buyer moved on to another house. They’re patient and shrewd buyers.

Now and then, a buyer finds a rare gem. One man found an original signed copy of Ernest’s Hemingway’s The Old Man and The Sea. He purchased the book for $2, and it’s probably worth more than $30,000. A buyer in Fresno, California bought a box of photo negatives for $45 and later found out they belonged to Ansel Adams. The images are worth more than $1.8 million. An Arizona buyer found a Jackson Pollack painting worth more than $5 million.[1] It pays to hunt for a bargain.

Investors can learn much from weekend yard sale shoppers like focusing on value, being patient, and having a plan. Patient investors can take advantage of market drops to find companies in the bargain bin. When stock prices drop, most investors tend to look the other way. Not so with value investors. If a company has issues, value hunters know they’re going to get a reasonable price. Sellers, on the other hand, are liquidating because of fear. For example, Kraft Heinz, Nordstrom, Walgreen’s, 3M, Pfizer, and Schwab are all down more than 10% this year, and investors don’t appear interested in these blue chips. It’s unlikely these companies will stay down forever, so at some point value investors will swoop in and start buying.

As we approach the end of the year, look for investments that are down and out that may rebound in a year or two. If you currently own poor-performing investments, be patient.

To improve your investment results, consider a financial plan. A well-constructed financial plan will help you identify and quantify your financial goals. A Certified Financial Planner® will use your financial plan to assist you with managing your debt, taxes, investments, retirement, education, philanthropic and estate planning needs.

“I am sending you out like sheep among wolves. Therefore, be as shrewd as snakes and as innocent as doves.” ~ Matthew 10:6.

October 9, 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. 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 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.

 

 

 

 

[1] https://bestlifeonline.com/garage-sale-finds/, Alex Daniel, February 22, 2019

Want More Income?

Interest rates are falling, and investors are starving for income. Coupon rates on U.S. Treasuries are paying less than 2% except for the 30-Year U.S. Treasury bond, which is paying 2.25%. Corporate bonds, CD’s, and tax-free bonds aren’t paying much more. The Federal Open Market Committee recently lowered interest rates by a quarter of a point, and they’ll probably do it again at their next meeting. With rates falling, how is it possible to generate more income?

One strategy to incorporate is a systematic withdrawal plan (SWP). This approach allows you to receive income from your mutual funds while taking advantage of the long-term growth from the stock market. Your payout will be a combination of income, dividends, capital gains, and principal. For example, if you invest $100,000 in a globally diversified portfolio of mutual funds and instruct your advisor to send you a monthly check for $400, then your payout will be 4.8% of your principal.

Your payout can be fixed or variable. With a fixed payout you’ll receive the same dollar amount regardless of your account balance. A variable payout will pay you a percentage of your account balance annually, so if your account rises, you’ll earn more income.

Let’s look at a few real-world examples.

Since 1926, a 60% stock and 40% bond portfolio has produced an average annual return of 8.92% while inflation averaged 2.89%, so the real return was 6.03%.[1]  Starting an example in 1926 is not realistic, so let’s look at three different periods: 2000, 2007, and 2009.

Each example will begin with a value of $100,000 and an annual withdrawal rate of 4% of the account balance. The mutual funds are managed by Dimensional Fund Advisors, and they’ll be rebalanced annually. The asset allocation mix is 60% stocks, 40% bonds. Here is the list of funds:[2]

  • DFA Large Cap Value (DFLVX) = 20%
  • DFA Large Cap International (DFALX) = 20%
  • DFA Small Cap (DFSTX) = 5%
  • DFA International Small Cap (DFISX) = 5%
  • DFA Real Estate (DFREX) = 5%
  • DFA Emerging Markets (DFEMX) = 5%
  • DFA Intermediate Government (DFIGX) = 20%
  • DFA Two-Year Government (DFYGX) = 20%

Example 1: January 1, 2000 to December 31, 2010. During this stretch, the S&P 500 lost 14.4%. Your original investment of $100,000 grew to $106,667, and you received $66,471 in total income. The average annual return was 6.6%.

Example 2: October 1, 2007 to August 31, 2019. From October 2007 to March 2009, the S&P 500 fell 48% during the Great Recession, so your investment timing was horrible, one of the worst times to start investing in history. As a result of your poor timing, your $100,000 sunk to $77,640, but you received $58,512 in income. Your average annual return was 3.4%. Despite the initial drop, you still made money.

Example 3. March 1, 2009 to August 31, 2019. During this stretch, the S&P 500 soared 298% or 14.05% per year. As a result of your great timing, your $100,000 is now worth $137,036, and you received $90,071 in income. Your average annual return was 10.98% per year.

Example 4. January 1, 2000 to August 31, 2019. During this time, the S&P 500 averaged 2.25% per year. Your original investment of $100,000 is now worth $99,975, and you received $121,534 in total income. Your average annual return was 6.27%.

A globally diversified portfolio of low-cost mutual funds gives you an opportunity to receive above-average income. You probably won’t start investing at a market top, or bottom, so rather than trying to time the market or trade your way to wealth, focus on your long-term goals. A diversified portfolio will allow you to capture global market returns over time, and over time, stocks win.

Invest globally, receive locally.

Here is part of the tradeoff with diversification. You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term. ~ Joel Greenblatt

September 26, 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.

 

 

 

 

[1] Dimensional Fund Advisors Returns Web, 1/1/1926 – 7/31/2019.

[2] Morningstar Office Hypothetical, gross returns before taxes and fees.

Certainty

We want certainty in an uncertain world. We want to know the weather report, and what’s for dinner, and where we’ll spend our vacation, and how our stocks will perform. If given a guaranteed chance of receiving $100 or a 50% chance of receiving $200, most of us will opt for the certain payout of $100.[1]

This past Saturday Saudi Arabia’s Abqaiq oil processing facility was attacked. The world’s largest oil field can produce close to 10 million barrels of oil per day, and this attack could knock out 50% of the kingdom’s production.[2] Because of the attack, West Texas intermediate crude oil spiked 14%.[3] How do you plan for a strategic strike on the world’s largest oil exporter? You can’t.

In 2016 Dennis Gartman said oil would not trade above $44 “in my lifetime.”[4] Crude oil closed at $61.56 on Monday. He was certain in his prediction.

Last year, Jamie Dimon, the CEO of JP Morgan Chase & Co, predicted the 10-year U.S. Treasury would hit 5%. It currently yields 1.79%.[5] He’s now preparing for 0% interest rates. Mr. Dimon has his pulse on the economy as the CEO of the world’s second-largest bank, and if he can’t predict the direction of interest rates, let alone the level, who can?

I feel sorry for analyst and experts who are forced to give price targets or predictions because it’s an impossible task. However, investors and the media want answers. If an analyst provides a price target, they must know something we don’t. But they don’t. It’s an educated guess. It gives us a false sense of security because we want the assurance that somebody somewhere knows something.

I worked for Morgan Stanley for several years, and after Dean Witter merged with Morgan Stanley, I was talking to an analyst about stock research reports. He said institutional clients focus on the depth of the research while retail investors look to the price target. Retail investors are looking for certainty.

Certainty is safety. If you bought a U.S. T-Bill and held it to maturity, you would never lose money because they offer a guaranteed return. T-Bills have generated an average annual return of 2.3% for the past 15 years while inflation averaged 2%. Stock market returns are uncertain and not guaranteed. The S&P 500 has returned 6.8% annually for the past 15 years, despite a 56% drop during the Great Recession. Certainty and lower returns are linked.

How can you plan for certainty in an uncertain world? Here are a few suggestions.

  • Financial Plan. Your plan will account for uncertainty, chaos, and disorder. The Monte Carlo simulation outlines several outcomes – some good, some bad. Money Guide Pro financial planning software will run 1,000 different scenarios to provide you with a range of possible results. John Maynard Keynes said, “I would rather be vaguely right than precisely wrong.” A Monte Carlo analysis will give ranges that will be vaguely right.
  • Short-term bonds will give you predictability and liquidity. When the world erupts in bedlam, short-term bonds provide a high degree of safety. Bonds and stocks are inversely correlated, so when one rises, the other falls.
  • A cash reserve will give you access to your money without having to sell your stocks when they are down and out. Cash levels vary depending on your situation. A recommended amount is three to six months’ worth of your household expenses. If you’re about to retire, I suggest holding three years’ worth of cash in a money market fund or investing in short-term bonds.
  • A globally balanced portfolio will give you exposure to thousands of securities scattered around the world.
  • Embrace uncertainty. Chaos and disruption allow you to purchase stocks and other risk assets at deep discounts. Buy low and sell high. When others are panic selling, you can buy great companies that should eventually rebound.

The only certainty is uncertainty.

“What you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.” ~ Danny Kahneman, Nobel Laurette – Economic Sciences (2002)

September 18, 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.

 

 

 

 

 

 

 

[1] https://www.gsb.stanford.edu/insights/why-uncertainty-makes-us-less-likely-take-risks, by Dylan Walsh, June 1, 2017

[2] https://www.cnbc.com/2019/09/16/aramco-saudi-arabia-attacks-on-oil-supply-wipes-out-spare-capacity.html, by Huileng Tan, 9/15/2019

[3] https://www.cnbc.com/2019/09/15/dow-set-to-fall-on-fears-spiking-oil-will-slow-the-global-economy.html, By Fred Imbert, 9/15/2019

[4] https://finance.yahoo.com/news/dennis-gartman-best-contrarian-indicator-165610794.html, By Wayne Duggan, June 8, 2016

[5] https://www.marketwatch.com/story/jamie-dimon-warns-of-5-treasury-yields-but-sees-stock-run-lasting-a-few-more-years-2018-08-06, by Rachel Koning Beals

A Weekly Budget

While playing football, my coaches corrected my behavior If I made a mistake. They’d stop me in my tracks to point out what I did wrong. The feedback was instantaneous. If they had waited months or years to highlight my error, it wouldn’t have been useful. Because of their enthusiastic shouting, I usually didn’t make the same mistake twice. Correcting behavior needs to be consistent and immediate.

You may need help in correcting a bad habit, like poor budgeting. If you’re like most people, you might check your balance once or twice per year – if at all. As a result, you probably don’t have a good idea of how you’re spending your money.

To improve your cash flow and spending patterns, consider reviewing your budget weekly. This small change in behavior will help you identify spending issues sooner rather than later. It will allow you to make changes to your spending patterns.

To simplify your budgeting process, consider automating it with an app like Every Dollar from Dave Ramsey: https://www.daveramsey.com/everydollar. Another great resource is Mint from Intuit: https://www.mint.com/. These apps will make it easier for you to reign in your finances. And, if it’s easy, you’re more likely to stay with it.

Consumers must get a handle on their spending because debt is spiraling out of control. Mortgage debt is $9.4 trillion, student loan debt is $1.5 trillion, and auto debt is $1.3 trillion.[1] Unfortunately, our government is not good at budgeting either. The budget deficit recently surpassed $1 trillion, and our national debt is north of $22 trillion.

How much debt is appropriate? Your total debt should be less than 38% of your total monthly gross income. If your gross income is $10,000, then your debt should be less than $3,800.

What about spending? According to the Bureau of Labor Statistics[2], here’s how much people are spending on certain items as a percentage of their gross income. How do you compare?

Food = 12.9%

Housing = 32.9%

Transportation = 16%

Healthcare = 8.1%

Utilities = 6.5%

Entertainment = 5.6%

Cell Phones = 1.9%

Pets = 1.1%

Are you ready to start working on your weekly budget review? Here are a few steps to help you get started.

  • Gather your bank and credit card statements from the past six months.
  • Input the data to Excel to Identify amounts and patterns. Most financial institutions will allow you to import the data directly to Excel, saving you a few hours of number crunching.
  • Automate your bill-paying to avoid late payment fees.
  • If you’re no longer using a service, turn off the automatic payment.
  • Download an app to track your spending.
  • Review your budget weekly.
  • Eliminate or reduce unnecessary expenses.
  • Use the extra savings to reduce your debt.
  • If your debt level is low, then set up an automatic investment plan.

A Certified Financial Planner™ can help you with your budgeting and planning needs. They’ll review your spending to help you develop a budget. They can also meet with you quarterly to evaluate your progress and hold you accountable, like a coach – without yelling!

A budget will bring you financial peace, and you can spend your money without guilt or worry.

For where your treasure is, there your heart will be also. ~ Matthew 6:21

September 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. 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.

 

 

 

 

 

 

 

[1] YCharts

[2] https://www.bls.gov/home.htm

Construction Project

My neighborhood is in the middle of an enormous construction project. It’s chaos. Dump trucks and bulldozers are moving massive amounts of dirt to expand our roads and intersections to handle more traffic. A new retail shopping center and access road are also under construction. Commuters are challenged with lane closures, lane shifts, and traffic jams.

Our neighborhood is cluttered with barricades and orange pylons. It doesn’t look good. It may be this way for another year or two, but when it’s finished, it will look amazing.

Projects of this size require years of planning, vision, persistence, and grit. Developing a financial plan and building an investment portfolio also requires imagination and perseverance.  Initially, your plan is a dream, and it will only take shape after you commit your goals to paper. The foundation for a successful investment experience is a financial plan. Your plan is your blueprint. Can you imagine construction workers working without a plan? I can’t.

A plan can take years, sometimes decades, to see it come to fruition. It’s challenging to plan for a retirement that’s more than 45 years away. Likewise, retirees might find it hard to rely on investments to generate a steady stream of lifetime income.

The construction projects succeed because electricians, plumbers, and masons have different specialties. Similarly, a successful investment portfolio requires investments scattered around the globe. Large, small, and international stocks deliver long-term growth. Bonds provide income and safety. Cash offers liquidity.

A general contractor coordinates and oversees the project and workers to keep it moving forward. A Certified Financial Planner® is your general contractor. He guides your steps to keep you focused on your goals and make appropriate adjustments.

Regular maintenance on buildings, lights, and sprinklers will keep the area looking good and functioning correctly for generations.  Your portfolio will also need regular maintenance to weather market and economic cycles. Rebalancing your portfolio will keep your asset allocation and risk tolerance in check. Your financial plan needs reviewing annually to keep you focused on your goals. A monthly savings program should help your account grow.

A good plan doesn’t matter if you don’t implement it and follow the instructions. It’s imperative to put your plan into action so you can enjoy the fruits of your labor.

“Plans are worthless. Planning is essential.” ~ Dwight D. Eisenhower 

September 9, 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.