5 Things Worse Than A Stock Market Crash

Stocks are tumbling, led by the Nasdaq. The tech-heavy index is down more than 25 percent this year. Numerous stocks have fallen more than 50 percent as investors sell speculative growth stocks, including Peleton, Teledoc, Palantir, Roblox, Redfin, Shopify, and Coinbase. Giant companies like Amazon, Disney, and Facebook have dropped more than 30 percent. It’s an ugly market.

However, I’m not worried because the market has always recovered. The Nasdaq crashed in 2000, 2008, and 2020, and despite the corrections, it bounced back to all-time highs. I’m optimistic the Nasdaq will return to its winning ways.

Stock market corrections are terrifying, but here are five items that can permanently destroy your family’s financial future.

  1. No savings. Saving money is the ultimate way to create generational wealth. After you get paid, allocate money to your retirement account, savings account, and emergency fund. How much should you save? As much as you can! A recommended savings percentage is 10% of your income. Timing is also essential, and the sooner you start, the better. If you habitually save money, then market corrections become less of an issue because you built a margin of safety, allowing your stocks to rebound and recover. I’ve noticed individuals who do not save money panic and sell when their investments fall because they don’t have a margin of safety or financial cushion. I don’t know how much your account balance will be worth if you regularly save money, but I do know if you don’t save any, it will be worth zero.
  2. No emergency fund. An emergency fund is essential during uncertain times and extreme market volatility. Investors prefer not to allocate funds to cash when stocks are soaring because it’s an earnings drag, but when stocks crash, cash is king. An emergency fund allows you to meet your obligations as stocks fall. What is the recommended amount? An emergency fund covering nine to twelve months of expenses is suitable if you’re working. For example, if your monthly expenses are $10,000, an emergency fund of $90,000 to $120,000 is appropriate. If you’re considering retirement, plan to cover three years of expenses. If your annual expenses are $120,000, then prepare for a balance of $360,000. A three-year cash cushion will help if you retire during a stock market collapse.
  3. No will. Dying without a will or estate plan is unacceptable, especially if you’re married or have children. Don’t leave your estate distribution plan to a probate court or state-appointed attorney. If you have substantial assets, hire an estate planning attorney. A good estate planning attorney is expensive but cheaper than trying to settle your estate without the proper documentation.
  4. No life insurance. Providing for your loved ones is paramount. If you owe money to your bank, have young children, or a spouse, then providing for their needs after you’re gone is a must. A lack of insurance planning can leave your family desperate to make ends meet. Spending a few dollars on insurance premiums can eliminate a lifetime of worry for your heirs.
  5. No financial plan. A financial plan quantifies your hopes and dreams and addresses the first four issues in this blog. During challenging markets, a financial plan brings financial peace. One of the first things we check when conducting financial reviews for our clients is the financial plan, and it gives us the confidence to make sound recommendations void of emotions or opinions. Most financial planning software accounts for wide market swings, so a significant market correction will not derail the majority of plans, which is the case for our clients.

Market corrections are painful, disruptive, and untimely but temporary. If you don’t save money, have a will, or own life insurance, you can permanently damage your family’s financial future.

The time to repair the roof is when the sun is shining. ~ John F. Kennedy

May 16, 2022

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.

Invest Like a Stoic

Stoics would have made great investors because they focused on issues they could control. Marcus Aurelius, Epictetus, and Seneca would probably have much to say about today’s markets or, more importantly, investor’s reactions to the performance of stocks and bonds.

Stocks and bonds face strong headwinds from inflation, rising interest rates, COVID, the supply chain, and the war in Ukraine. These areas are causing heartache among investors as global markets crumble. Yet, we can’t control the outcome of these worldly events.

What can you control? As an investor, you can control your spending and savings; that’s about it. If you reduce your spending, you can increase your savings, and the more you save, the better. Of course, if your spending rises, you may have to reduce your savings.

Here are a few tips to help you manage your assets and emotions.

  1. Automate your expenses by depositing your paycheck and paying your bills. Automation simplifies your life and helps you avoid late fees and penalties.
  2. Automate your savings. Automate your investment accounts after setting up your 401(k) plan. Link your checking and savings account to build up your emergency fund. Transferring dollars monthly from checking to savings gives you access to the funds while increasing your emergency reserves.
  3. Buy the dip. If you automate your savings, you can buy the dip without emotion. It’s hard to buy stocks when they fall, but you can eliminate this fear through automation.
  4. Do not check your accounts. If you review your accounts daily, try doing it weekly. If you review them weekly, try doing it monthly. If you review them monthly, try doing it annually. The less you look at your investments, the better, especially if you own a diversified portfolio of low-cost funds.
  5. Manage your time horizon. If you need access to your funds in one year or less, deposit your money in money market funds, CDs, or T-Bills! If your horizon is three to five years or more, buy stocks.
  6. Build a financial plan. A financial plan guides your financial future and quantifies your hopes, dreams, and fears.

You can control your savings, spending, and outlook, but you can’t control inflation, interest rates, or world war. Despite these recurring issues, stocks rise more than they fall.

From 1926 to 2021, the stock market has risen 75% of the time.[1]

Best five years:

  • 1933 = up 56.7%
  • 1954 = up 50%
  • 1958 = up 45%
  • 1935 = up 44.4%
  • 1975 = up 38.8%

Worst five years:

  • 1931 = down 43.5%
  • 2008 = down 36.7%
  • 1937 = down 34.7%
  • 1930 = down 28.8%
  • 1974 = down 27%

A key takeaway is that the best years follow the worst years; sharp down days precede strong up days, and risk and return are linked.

I don’t know when stocks will recover, so follow your plan and focus on what you can control.

We control our reasoned choice and all acts that depend on that moral will. ~ Epictetus

April 26, 2022

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                                     


[1] The Rewarding Distribution of US Stock Market Returns – Dimensional, 1926 to 2021

Do You Offer Insurance?

Insurance is one thing few people love to buy, and it is something we hope we never use. Thankfully I’ve never used my homeowner’s insurance to rebuild my home from a fire though I’ve been paying premiums for a quarter of a century. I would have been better off investing my dollars in the stock market rather than paying my premiums, but that’s not the point. Insurance is a must-own product to protect several parts of your life.

Since I launched my investment firm, I’ve not offered insurance products until now because I’ve been frustrated with the process of referring clients to insurance brokers. Also, during our financial planning process, we have witnessed horror stories where people were under-insured or did not own any coverage. As a result, we now offer insurance services to help our clients better.

Insurance should cover high-risk, high-cost items like your life, home, car, business, etc. You do not need insurance to pay for low-risk, low-cost things like repairing your windshield after a rock hits it.

Who should own insurance? Let’s take a look.

If you are responsible for children or other people in your life, you need life insurance. Life insurance is not about you but your loved ones. It’s irresponsible and selfish not to own a policy that will protect your family if you die young or without assets. Your life insurance amount should replace your salary until your children are grown, pay for their college, eliminate your debt obligations, and provide an income stream for your spouse. And, yes, you should purchase insurance for your non-working spouse. As your assets grow, your children age, and you reduce your debt, then the need for life insurance dwindles.

If you’re self-employed, disability insurance is a must. You can only die once, but you can become disabled several times, so it’s imperative to generate income while you’re incapacitated. Disability insurance meets this need.

As people age, longevity risk is a genuine concern. An annuity will ensure you do not outlive your money, and it will provide a guaranteed income stream for life, a promise few other investments offer.

Long-term care insurance offsets the high cost of a nursing home or assisted living facility, and it can also offer home healthcare. Adding a long-term care insurance rider to your life insurance policy may offset the cost of a standalone policy. According to smartasset™, the estimated annual cost for a private nursing home is $108,408, and it’s rising faster than inflation.[1] A policy covering three to five years in an assisted living facility is good to start.

No one likes to talk about their mortality or contemplate bad things happening to their family. Still, it is imperative to review your obligations and commitments so you can protect those you love. You can transfer your risk to the insurance company for a few dollars, and paying for insurance premiums is less costly than dying without life insurance.

Does everybody need insurance? No. You can self-insure if you own substantial assets like stocks, bonds, or cash. How much money is required to self insure? It depends on your situation, but a financial plan can answer the question of how much is enough.

A policy of life insurance is the cheapest and safest mode of making a certain provision for one’s family. ~ Benjamin Franklin

April 4, 2022

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.


[1] https://smartasset.com/insurance/how-much-does-long-term-care-insurance-cost, Javier Simon, 4/1/2022

What Can Happen?

We recently stress-tested our client’s financial plans to determine how they would withstand a 50% stock market correction and a perpetual inflation rate of 5.25%. Thankfully, most plans withstood the test. Since 1971, there have been several corrections of 40% or more – 1974, 2002, and 2008; the S&P 500 fell 32% during the COVID correction. Inflation has averaged 3.24% since 1914, so we are confident that our plans can perform well in various market conditions.

What about the plans that failed our test? After screening all our plans, we focused on those that did not pass, and, after tweaking a few inputs like asset allocations, spending limits, or retirement dates, they improved noticeably.

We are in tumultuous times and face astronomical headwinds from inflation, rising interest rates, and war. Markets react fiercely to news headlines, and volatility is the new normal, and it’s challenging to hold stocks when they gyrate wildly. Despite all the recessions, corrections, drops, and pullbacks, the S&P 500 has risen 4,750% since 1971. The market rewards the patient buy-and-hold investor.

How would your life change if your investments fell 50 percent? Could you still provide for your family? Will your basic needs be met? If so, stay the course. If not, consider reducing your equity exposure by adding bonds and cash.

Who knows what will happen tomorrow – no one knows. I’m not aware of any analyst or expert who accurately predicted COVID or the Ukraine War – two significant events impacting everyone. We can die a thousand deaths worrying about every possible outcome, but it’s not worth it. Instead, follow your financial plan, diversify your assets, and think long-term.

The road to success is dotted with many tempting parking spaces. ~ Will Rogers

March 23, 2022

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.

A Financial Whirlpool

Markets are in a financial whirlpool as they try to navigate the treacherous waters of Ukraine, inflation, rising interest rates, and China’s recent lockdown. Stocks and bonds react violently to the headlines, and volatility is off the charts. There are few places to hide.

The Federal Reserve will raise interest rates by a quarter of a point this week to try and tame inflation, which is currently averaging 7.8%. This year, interest rates are up significantly despite the Fed’s inaction, so investors already understand the impact of rising rates through lower bond prices or increased mortgage payments.

Gas prices are soaring at the pump, and the national average is $4.4 per gallon, an all-time high. In some parts of California, the cost of gas is north of $7! The higher prices are arriving just in time for the driving season.

The Federal Reserve is fighting inflation, but the recent data could send our country into a recession. At some point, individuals will decide between paying for essential items and non-essential ones. Escalating food and gas prices are taking a toll on the consumer, and rising interest rates make purchasing a home less affordable. People will stop spending money on travel and entertainment to put gas in their cars and food on the table, and when spending slows, recessions tend to follow.

If you believe inflation prevails, then stocks, real estate, and commodity investments should perform well, but bonds will not. As inflation climbs, the Fed will continue to raise interest rates. The last serious battle with inflation occurred more than forty years ago when it rocketed above 14%. It peaked in 1980, and then both inflation and interest rates dropped substantially. In 1982, stocks started one of the great bull runs in history, rising 160% before it was inconveniently interrupted by the crash on October 19, 1987.

If you are in the recession camp, bonds will perform well, while stocks, real estate, and commodity investments will not. The last prolonged recession occurred from 2007 to 2009, when the S&P 500 fell 53%, and bonds soared 26% at the trough of the Great Recession.

Will we experience inflation or a recession? That’s the $64,000 question. It’s impossible to know because we can make a case for both, and that’s why we’re in a financial whirlpool. If you rafted down a river, you know it’s hard to get out of a whirlpool – near impossible because two opposing currents cause a vortex that sucks everything down a drain. The opposite economic currents are inflation and recession, and only time will tell who wins. However, it’s smooth sailing once you get out of the whirlpool.

How can you protect yourself from a financial whirlpool?

  • Diversify your assets to include stocks, bonds, cash, and alternative investments. A balanced portfolio exposes you to asset classes that perform well in different economic conditions. And don’t forget to add international holdings because not all countries experience recessions simultaneously.
  • Eliminate your debt to ride out the storm: pay off car loans, student loans, credit cards, and mortgages. Being debt-free can bring you peace of mind, especially in uncertain times. Also, reducing your debt payments allows you to save and invest more money.
  • Increase your cash position. Extending your emergency fund to cover nine to twelve months of expenses allows your stocks and bonds time to recover.
  • Buy stocks. Stocks have always recovered. If your time horizon is three to five years or more, consider adding great companies to your portfolio.
  • Follow your financial plan. A financial plan can help you stay invested during difficult times. We recently tested our client’s plans against a 50% stock market correction and a sustained inflation rate of 5.25%. Thankfully, the results were mostly positive.

It’s a difficult time with much uncertainty, so invest wisely, proceed with caution, and follow your plan.

Happy paddling!

Rivers know this: there is no hurry. We shall get there someday. ~ A.A. Milne, Winnie-The-Pooh

March 15, 2022

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.

Stock Market Correction Checklist

Stocks are sinking under the weight of the Russian invasion. The S&P 500 is down 12%, while the NASDAQ is off 18%. It’s a tough time to own stocks. Should you sell? Here is a quick checklist to help you make a better investment decision.

  • Do you need the money?
  • Do you have an emergency fund to cover three months of expenses or more?
  • Is your time horizon five years or more?
  • Are your assets diversified across stocks, bonds, and cash?
  • Do you own a balanced portfolio of low-cost mutual funds or ETFs?
  • Did you sell stocks in March 2020?
  • Did you sell stocks during the fourth quarter of 2018?
  • Did you sell stocks during the Great Recession – 2007 to 2009?
  • Did you sell stocks during the Tech Wreck – 2000 to 2002?
  • Did you sell stocks on October 19, 1987?
  • Did you sell stocks when Russia invaded Syria?
  • Did you sell stocks when Russia invaded Crimea?
  • Did you sell stocks when Russia invaded Chechnya?
  • Did you sell stocks when Russia invaded Afghanistan?
  • Do you have a financial plan?
  • Do you have a family will or trust?
  • Do you have adequate life insurance to protect your family?
  • Do you have disability insurance?
  • Do you own long-term care insurance?
  • Do you study balance sheets, income statements, and cash flow statements if you own stocks?
  • Do you own any stock that accounts for more than 25% of your assets?
  • If you have children, are you funding their 529 education account?
  • Are your monthly debt payments less than 38% of your gross income? For example, if you earn $10,000, your total debt payments should be less than $3,800.
  • Are you contributing to your company’s retirement plan?
  • Do you invest 10% of your income?
  • Do you donate 10% of your income to charities, non-profits, or organizations you support?

If your financial and estate plan are current and you don’t need money, consider staying the course. If you have an emergency fund, your assets are diversified, and you’re investing regularly, consider staying the course. If your life and disability insurance will protect your family, consider staying the course. If you did not sell stocks in March 2020 or during Russia’s previous invasions, consider staying the course.

If you need money, you don’t have a financial or estate plan, your time horizon is less than one year, or you sold stocks during previous corrections, consider selling your stocks.

I don’t know where the market is going in the short-term – too much uncertainty. However, stocks will recover. It might take a few months or a few years, but stocks have rebounded from previous corrections. It takes patience, courage, and a plan to create wealth, and it’s challenging to amass wealth if you panic and sell when times are tough.

Courage is being scared to death and saddling up anyway.” ~ John Wayne

March 8, 2022

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.

Diversification

Investors are learning about diversification in real-time as markets react to news in Ukraine. Stocks are falling, and gold is rising. Before the invasion, stocks had been a one-way trade as the S&P 500 soared 272% over the past ten years, averaging 14% per year, far outpacing most investments. Stocks trounced bonds, gold, oil, and international investments. If you concentrated your bets in large-cap stocks, you nearly tripled your assets, but your returns were less if you diversified your assets.

After the invasion, however, the script has flipped. The S&P 500 has entered correction territory, and gold and energy investments are up considerably.

Diversification is the key to investment survival because it’s impossible to predict which market will do well from one day to another. No one predicted COVID-19 or Putin’s invasion of Ukraine, so the best offense is a good defense. It’s rare for investors to concentrate their holdings and hold them forever because most people can’t stomach the downturns. Investors are bold when stocks rise but run for cover when they fall. To capture long-term returns from equities, you must endure a few years of negative returns as stocks do not rise in a straight line.

Diversification is discussed often on Wall Street, but what does it mean to own a diversified portfolio? At the core, it means allocating your assets across stocks, bonds, and cash – stocks for growth, bonds for income, and cash for liquidity.

The S&P 500 has generated an average annual return of 10% since 1926, but it also experienced several dips. Add small-caps, international holdings, and emerging market companies to diversify your holdings further. Global equity exposure reduces your risk, but be careful against single market risks like China and Russia.

Bonds provide income and safety. Bonds can consist of US Treasuries, corporate, and municipal bonds with maturities ranging from months to centuries. Diversifying your assets across bond types and maturities can further protect your assets.

Cash is king and liquid. Checking and savings accounts, CDs, T-Bills, and money market funds are excellent reservoirs for cash investments. Allocate money to a cash account if you must access it in one year or less. Also, park your money in cash if you take distributions from your IRA, 401(k), or investment account. For example, if your monthly distributions are $10,000, consider allocating $90,000 to $120,000 to your cash account. When your cash balance falls, replenish it by selling stocks or bonds.

The S&P 500 is down 10% on the year, but a balanced portfolio of 50% stocks and 50% bonds has only declined 4.5%, buoyed by the bond and cash allocations. However, over the past ten years, the all-stock index has trounced the balanced portfolio by a 2 to 1 margin.

Our diversified models invest in several asset classes: technology, industrials, financials, healthcare, consumer cyclical, consumer defensive, basic materials, real estate, communication services, and energy. The models own several thousand securities sprinkled around the world.

As long as Putin continues to bombard Ukraine, the volatility will continue, so diversify your assets and follow your plan. If your time horizon is five years or more, buy stocks. If you’re young or don’t need money in the near term, falling stocks allow you to purchase great companies at lower prices. If you need money in the near term, keep your funds in cash and do not buy stocks.

Be fearful when others are greedy, and be greedy when others are fearful. ~ Warren Buffett

March 7, 2022

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.

Parrott Wealth Management Annual Letter

Parrott Wealth Management Annual Letter

Despite political turmoil, Delta, Omicron, rising interest rates, increasing inflation, supply chain issues, and several corrections of 4% or more, the three major US indices produced significant gains last year, led by the S&P 500 as it climbed 27%. Stocks were resilient to the surprise of many astute market observers. Large companies like Microsoft, Alphabet, and Pfizer outperformed small-caps and international stocks by a wide margin. Bonds were negative as interest rates climbed, and most emerging markets fell because of exposure to Chinese securities. Here is a look at how various asset classes performed in 2021.

  • Real Estate = 36.59%
  • Small-Cap Stocks = 24.60%
  • International Stocks = 7.84%
  • Emerging Markets = -1.30%
  • Bonds = -3.90%
  • Gold = -4.15%
  • Oil = 49.65%

Though US Stock market valuation metrics are rich and extended, the market can still trade higher. Relative to US companies, international stocks offer tremendous value.

Philosophy

The root of what we do is financial planning. A financial plan helps us manage your account better because it focuses on your hopes, dreams, and fears. It gives us the confidence to make recommendations that benefit you and your family.

We believe in the buy-and-hold strategy of investing. Meaning, we don’t make a lot of trades or changes to the portfolios, and we hold our investments through all types of market conditions – good, bad, and ugly because we have not found a better approach for investors to create generational wealth. Timing the market does not work, and it’s like teaching a pig to sing. It’s a waste of time, and it annoys the pig.

PWM Models

Our managed models performed well last year, producing gains except for our most conservative model, which is 100% bonds, and it dropped 1.29%. Our all-stock model climbed 24.26%. The models are diversified and built with funds managed primarily by Vanguard, Dimensional, and BlackRock and designed to take less risk than the market. For example, our all-stock model is approximately 20% less risky than the S&P 500.

China

We reduced our Chinese stock allocation significantly because of the actions of the Chinese government towards their publicly traded companies. At this point, we consider China uninvestable. We sold Vanguard’s Emerging Markets Fund ETF (VWO) and transferred the money to the iShares MSCI Emerging Markets ex-China ETF (EMXC). The ex-China fund closed the year up 6.6%, while Vanguard’s fund fell 1.3%. We will make a similar change with Dimensional’s Emerging Markets Fund.

Bonds

Bonds finished in negative territory as they reacted to rising interest rates and escalating inflation. When interest rates rise, bond prices fall. Our bond exposure remains short-term, with maturities ranging from a few months to a few years, and we will stay short-term until rates rise further. If rates do rise, the impact on our bond portfolios should be minor. We continue to buy bonds for safety and diversification because stocks will fall eventually, and bonds will perform well when they do. Bonds are negatively correlated to stocks and still provide one of the best hedges for tumbling stock prices. We also are buying bonds for accounts with large cash balances since money market rates are near zero; they are the lesser of two evils.

Bitcoin

I continue to swing and miss when it comes to Bitcoin. The popular cryptocurrency soared 57% last year despite a year-end sell-off. I’ve been wrong on cryptocurrencies forever, and this trend likely continues for the foreseeable future because I don’t understand it or have a clue about how it works. I don’t consider it a currency because it’s too volatile, so, by default, it’s an asset class like gold or silver. Crypto experts love Bitcoin because it’s not correlated to stocks, and it’s an inflation hedge. However, lately, it rises when stocks rise and falls when stocks fall, meaning it’s correlated to stocks. And since inflation has surged, Bitcoin has dropped. Also, Bitcoin and other cryptocurrencies are only fourteen years old, and the last time we experienced significant inflation was more than forty years ago. Hence, it’s too early to tell how it performs in an inflationary environment. According to crypto.com there are 10,586 coins, including Polkadot, Tron, and SafeMoon. As a comparison, there are currently 10,342 US publicly traded securities. And there’s nothing to stop you, me, or my dog Cricket from launching a new crypto coin, so how do you pick the best one? I’m not sure it’s possible. Historically, wealth created from nothing does not last.

Working From Home Stocks

Last year was a boon for working from home (WFH) stocks, but not this year. As the economy reopened, companies like Peleton, Zoom, Docusign, Stitch Fix, and others fell back to earth. I wrote in last year’s letter that “at some point, valuations will matter, and investors will focus on earnings, revenue, cash flow, and profits; until then, tread lightly and be careful with these high-flying investments.” This year, DocuSign dropped 31%, Zoom fell 45%, Stitch Fix declined 67%, and Peloton crashed 76%. I’m sure a few WFH stocks recover, but they’re still expensive, so my advice from last year still stands.

Deficits and Debt

I must balance my budget because I will eventually lose my business and home if I don’t. The federal government, however, does not. Our government can print money and run a deficit forever, and it mostly has. Public, searchable records date to 1901, and the first deficit occurred in 1904 at $43 million, equivalent to $1.4 trillion today.[1] And since 1904, our government has run a deficit 76% of the time. In 1943, the budget deficit accounted for 27% of GDP; today, it’s 15%.[2] The budget deficit fell below $100 billion for the first time in 1982.

Our government’s last surplus was in 2000, before the Tech Wreck, where stocks fell 43%, and our country entered a deep recession. Before 2000, the previous surplus year was 1960.

Our current deficit is $3.12 trillion as our government sent stimulus checks to people in need and offered airlines resources to keep flying. During the Great Recession from 2007 to 2009, the budget deficit touched a low of $1.5 trillion when the government bailed out auto manufacturers, banks, and insurance companies; as the economy recovered, the deficit improved to a negative balance of $469 billion by 2015.

During times of economic pressure like wars, recessions, or pandemics, our country comes to the rescue and, as a result, runs a deficit. When the economy thrives, the government reduces or eliminates its debts. For example, in 1943, the budget deficit was a negative $55.5 billion as it financed WWII. By 1949, after the war and the troops returned home, the government produced a surplus of $10.5 billion.

What does this mean for the stock market? Not much. Since 1915, the Dow Jones has risen more than 48,000 percent. Deficits look scary, but they don’t have much of an impact on stocks.

PWM Growth Indicators

Our “Starbucks card indicator” continues to percolate, showing signs of significant growth. This year we mailed 145 cards to our clients, up 20% from last year and more than 150% since we started doing it in 2017. If we examine traditional growth metrics like assets and revenues, PWM grew 36% last year, and our average annual growth rate for the past six years has been 41%.

Janet

Janet, our Director of Client Services, is celebrating her fifth anniversary with Parrott Wealth. She joined the firm on January 2, 2017. Janet is a tremendous asset to the firm and continues to make our back-office hum without issues. I’m encouraged because most of you bypass me altogether and contact Janet directly for assistance with your accounts. She was valuable last year as we transitioned from state to federal regulation.

Spencer

Our headcount grew by one last year as Spencer Engelke joined PWM. Spencer has been an outstanding hire, and he is currently working on obtaining the Certified Financial Planners designation and has already passed module one. Spencer’s primary focus is on financial planning but occasionally assists me with trading.

SOAR Wealth Management

We launched SOAR Wealth Management in 2021 to help new, first-time, or emerging investors. Betterment manages the investment portfolios while we assist them with budgeting, debt management, and financial planning. The website is http://www.soarwm.com.

2022 Predictions

Last year, most of my predictions came true, so the pressure is on to replicate my success. If you want to review the previous year’s results, email me at bill@parrottwealth, and I will forward you a copy. Here are my thoughts for 2022.

  1. The S&P 500 will rise 10%. It’s not much of a prediction since the popular index has averaged 10.1% for the past 95 years.
  2. If the Federal Reserve raises interest rates, they will do so only once or twice.
  3. The rate of inflation will fall. It’s currently 6.81%, and I believe it drops below 4%.
  4. Housing remains robust as apartment dwellers and millennials continue to buy new homes. The prices of vacation homes remain elevated as cash-rich investors diversify their assets beyond stocks and bonds.
  5. President Biden passes a watered-downed version of the infrastructure bill.
  6. China continues to crack down on publicly traded companies, billionaires, and Taiwan, further depressing its stock prices.
  7. The House and Senate flip to the GOP in the November elections.
  8. COVID is here to stay, requiring an annual booster similar to a flu shot.
  9. The Great Resignation continues as workers retire early because of COVID and stressful work environments. Individuals will leave the workforce to pursue their hobbies.
  10. Travel surges next year as people leave their COVID caves. Attendance at National Parks soars as people prefer to drive rather than fly.

Thank You

We appreciate you and your business. We know you have numerous firms to help you reach your goals, and we’re thankful for the trust you placed in Parrott Wealth Management. We are blessed beyond measure.

As our firm grows, we’re honored to work with second and third-generation clients. Last year, we opened several accounts for college students and recent graduates referred to us by their parents or grandparents. We are excited to help these youthful investors build solid investment foundations.

2022

May the new year bring you peace, prosperity, health, happiness, and rest. My prayer is that this year will be your best!

Now may the Lord of peace himself give you his peace at all times and in every situation. The Lord be with you all. ~ 2 Thessalonians 3:16

Sincerely,

Bill Parrott

President and CEO

Austin, TX

January 3, 2022


[1] YCHARTS US Government on-budget surplus or deficit – 1901 to 2020.

[2] FRED Economic Data – Federal surplus or deficit as a percent of GDP – 1930 – 2021.

Do You Need A Corporate Trustee?

Family dynamics are fascinating. After more than thirty years in the investment management and financial planning industry, I’ve noticed most families are similar. There are patriarchs, matriarchs, do-gooders, black sheep, brilliant minds, athletes, know-it-alls, Republicans, Democrats, meat-eaters, vegetarians, rich, poor, entitled children, lost souls, and courageous explorers. If you think yours is different, take a long look at your family tree or discuss a hot topic like politics, Bitcoin, or COVID at your next family gathering.

Because of COVID, several clients asked me about naming a successor trustee for their family trust. In some cases, it’s an easy decision, but at other times it’s not. Should you list a child, and if you have multiple children, which one? If you don’t have children, do you add a cousin, a sibling, or a brother-in-law?

After decades of wealth creation, naming a successor trustee to honor your wishes should not be taken lightly, and it’s a critical decision. Will your child have the capacity to manage your estate? Will a third cousin invest your assets wisely? Who knows. And, once you’re gone, there is nothing you can do about it. Rather than naming a family member, is there a better option?

A corporate trustee could benefit all parties because they’re not emotionally attached to your family, and it’s pure business. In addition, to honoring your wishes, they’ll distribute funds to your loved ones, charities, and others you support. They’ll file trust tax returns, and, more importantly, they are perpetual. Unlike your successor trustee, they won’t die. Your child could benefit from a corporate trustee as well. The burden of managing and distributing an estate is stressful, time-consuming, and complicated. It took my mom years to settle her parent’s estate. A corporation with several attorneys, tax experts, and advisors may have been a better option for my grandparents, though my mom did an excellent job.

Corporate trustees manage several trusts, including living trusts, life insurance trusts, charitable remainder trusts, and generation-skipping trusts. In addition, they can invest your assets professionally to grow them for future generations. Of course, a corporate trustee is not free, and your estate must pay a fee for their services, but it could be money well spent if it brings you peace knowing they are honoring your wishes.

Here is a list of corporate trustees.

Schwab Personal Trust Services:

https://www.schwab.com/personal-trust-services#beacon-deck–86741

Fidelity Personal Trust Services:

https://www.fidelity.com/managed-accounts/portfolio-advisory-service/personal-trust-services

Vanguard Personal Trust Services:

https://investor.vanguard.com/advice/trust-services

The strength of a family, like the strength of an army, is in its loyalty to each other. ~ Mario Puzo

January 8, 2022

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.

The Year in Pictures

I loved reading the Year in Sports by Sports Illustrated as a kid. It was a collection of their best pictures from the previous year and required reading for my cohort of friends. So here is a look at how markets, investments, and economic indicators performed last year.

The S&P 500, Dow Jones, and NASDAQ performed well last year.

Though stocks performed well, they fell several times last year.

The bond market struggled last year as interest rates and inflation climbed.

Working from home stocks got crushed as investors focused on earnings, profits, and cash flows.

Bitcoin had another excellent year but sold off significantly in November and December.

Gold finished in negative territory despite rising inflation.

Inflation jumped last year, finishing the year at 6.81%.

Growth beat value again despite a robust first-half surge from value companies.

GDP posted a solid gain.

Household debt continues to climb.

International investments lagged US stocks.

Large-caps outperformed small caps, which beat mid-caps.

Interest rates rose significantly last year.

Real estate markets turned in another stellar year.

Unemployment rates dropped last year.

I wish you and your family a Happy New Year. Follow your plan, diversify your assets, save your money, invest often, rebalance your accounts, think long term, and good things will happen.

A picture is worth a thousand words. ~ Albert Einstein

January 7, 2022

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.