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.

 

 

 

 

Call an Expert!

It was time to upgrade my laptop because my old computer was starting to show its age. I did my homework by comparing models, prices, warranties, etc. I had a working knowledge of computers and knew what I was looking for, so I didn’t consult anyone about my purchase.

After my due diligence was done, I purchased a brand name computer from a big box retailer. I spent one Saturday afternoon transferring the data to my new laptop. The transfer was easy and seamless. I was ready to go. However, my computer wasn’t. It was extremely slow. I was frustrated and upset at the lack of response from my new system, but I was going to give it a couple of days to see if it improved. No luck. The speed never increased, and the performance lagged my old computer. Most of my software systems were running at less than optimal performance.

I vented to my wife. She listened, for a while, and then told me to call an expert.

A few days later I contacted an IT expert to help me trouble shoot my system. The first thing he did was check the speed of the CPU. He showed me my CPU’s speed relative to others, and it was close to last, if not dead last. My computer would never be fast. Thankfully my purchase was still under warranty, so I returned it.

With the help of my IT consultant, we picked a new computer based on my needs. My new computer is smaller, lighter, and faster than my previous one. It works like a charm. Had I hired him prior to my first purchase I would have saved a lot of time, hassle and money.

Individual investors should hire an expert as well. Regardless if you’re a do-it-yourself investor or someone who has no interest in managing money, a professional can potentially help you improve your financial situation.  We can all use a little help.

Here are a few ways a Certified Financial Planner® can help you with your finances.

  • Budgeting
  • Financial Planning
  • Retirement Planning
  • Estate Planning
  • Education Planning
  • Special Needs Planning
  • Investment Advice
  • Investment Selection
  • Asset Allocation Models
  • Asset Management
  • Business Valuations
  • 401(k) Guidance
  • Cash Flow Planning
  • Charitable and Philanthropic Planning
  • Income Distribution
  • Required Minimum Distributions
  • Social Security Optimization
  • Beneficiary Updates and Reviews
  • Debt Management
  • Equity Compensation Analysis
  • IRA Rollovers
  • Life Insurance Analysis
  • Long-Term Care Insurance Analysis
  • Asset Protection
  • Risk Management
  • Fee Analysis
  • Second Opinions

This list gives you a good idea of the services provided by a Certified Financial Planner.® In addition, most planners have access to CPA’s, attorneys, mortgage brokers, bankers, and other professionals who can help you with most of your planning needs. Give us a call. Don’t go it alone!

for by wise guidance you can wage your war, and in abundance of counselors there is victory. ~ Proverbs 24:6

July 11, 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 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.

 

 

 

 

 

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

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.