Tag: Interest Rates

It’s An Emergency!

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Dave Ramsey takes a lot of heat from financial professionals, but his seven steps have helped millions of people pursue a better life. I don’t agree with his entire philosophy, but establishing an emergency fund,  paying off debt, and saving for retirement are tenants that make sound financial sense.

During challenging times, an emergency fund is paramount. I recently bought a new refrigerator, and my Jeep needs an engine repair. Thankfully, I have an emergency fund to cover the costs. If I didn’t have the fund, I would have charged the expenses to my credit card, and a credit card is not an emergency fund!

Stocks and bonds are down sharply. The S&P 500 has dropped 21%, while long-term bonds have fallen 26%. It’s difficult for investors as all major asset classes are in negative territory, and cash is the best-performing asset. If cash is your best investment, you know it’s a tough year! However, a significant cash balance allows your stocks and bonds to recover, and that’s why an emergency fund is necessary if you want to be a successful investor.

What is an emergency fund? Well, it’s a fund you can tap in an emergency, so you’re not forced to sell stocks or bonds when they’re down. The fund is a liquid resource you can tap at any time without losing money. Your emergency fund should own cash, money market funds, CDs, or T-Bills. A silver lining to rising interest rates is you can buy short-term investments with competitive yields. The 1-Year Treasury rate currently yields 3.15%; two years ago, it was 0.14%, an increase of 2,150%!

Here are a few suggestions for establishing your emergency fund.

  • Invest in short-term instruments like cash, money market funds, CDs, and US T-Bills.
  • Your emergency fund should cover nine to twelve months of expenses in the current environment. For example, if you spend $10,000 monthly, your fund value range would be $90,000 to $120,000.
  • Ladder your emergency fund with CDs or T-Bills maturing monthly: one month, two months, three months, etc. The short-term maturities provide liquidity when you need it most.
  • Automate your savings so you don’t have to think about investing monthly.
  • Don’t use Bitcoin, stable coins, credit cards, or a line of credit as a substitute because they can lose value or get terminated by your bank. During previous recessions, banks curtailed credit, and it wasn’t easy to get a loan.

Markets always recover as they did in 2020, 2018, 2016, 2008, 2000, etc., and an emergency fund allows your stocks and bonds to rebound. Cash is valuable, especially when the economy and markets are imploding.

An emergency fund turns a crisis into an inconvenience. ~ Dave Ramsey

June 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.

Offense and Defense

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The New England Patriots trailed the Atlanta Falcons 28-3 in the third quarter of Super Bowl LI. At that point, the odds of winning the game were about 1% to 3%. Their situation was dark and bleak. Did the Patriots panic or quit? No. They kept their composure and followed their game plan despite digging a big hole, and slowly but surely, they engineered the most incredible comeback in Super Bowl history, winning the game 34-28.

The current investment environment is depressing as stocks and bonds continue to fall over worries Russia will start another meaningless war. Russia’s eagerness to invade Ukraine overshadows other headwinds like inflation and rising interest rates.

Russia has a long history of war, dating back to 879. In 1979 they invaded Afghanistan and remained there for ten years.[1] During their occupation, the S&P 500 climbed 267%. Inflation peaked in 1979 at 13.3% and dropped to 5.8% by 1989. In 2014, they annexed Crimea, and since then, the S&P 500 jumped 135%.[2]

Inflation averaged 3.8% during World War I, and stocks averaged 10.1% from 1939 to 1945. The year after Pearl Harbor, the S&P 500 rose 20.3%, and by the end of the war, it soared 102%.[3]

I’m not comparing football to war, but we can learn much from the Patriot’s Super Bowl victory.

  • Don’t panic. If you panic and sell during down days, you’ll never experience victory. Markets rise and fall daily, like the tide. Since 1926, the S&P 500 had stretches where the returns were less than 2%. From 1929 to 1944, stocks averaged 1.7%, from 1969 to 1975, they returned 1.6%, and from 2000 to 2011, they earned 1.7%. For thirty years, stocks averaged about 1.7%, but since 1926 they averaged 10.1% per year if you held stocks in good times and bad.
  • Follow your plan. The Patriots followed their game plan, and I’m sure they made adjustments. When financial chaos arrives, we often check our client’s financial plans to ensure they are on the right path and the recent volatility is not impacting our client’s goals. A financial plan allows us to navigate difficult circumstances with confidence, and it can help you as well.
  • Play offense. It pays to play offense when stocks fluctuate because they eventually recover. If you don’t have equity exposure when they take off, you can miss significant opportunities. The biggest up days typically follow the biggest down days. If you wait for the all-clear signal, it’s too late. After stocks bottomed in March 2020, they soared 45% over the next six months despite the uncertainty surrounding COVID.
  • Play defense. During financial uncertainty, it pays to play defense because stocks could remain depressed for a long time. If stocks drop, allocating money to cash and bonds can help preserve your assets.
  • Be patient. If your time horizon is three to five years or more, continue buying and holding stocks. If you need the money in one to three years, consider money market funds, CDs, T-Bills, etc.

The market hates uncertainty, which is why stocks are down, and volatility is up. If there is good news, stocks rise, and they fall if there is bad news. Unfortunately, it will remain this way until there is clarification surrounding Russia, inflation, and interest rates.

The Patriots won Super Bowl LI because they followed their plan, played both offense and defense, did not panic, and were patient. Let’s follow the Patriots game plan, even if you’re a Giants fan.

I know worrying works, because none of the stuff I worried about ever happened. ~ Will Rogers

February 20, 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://en.wikipedia.org/wiki/List_of_wars_involving_Russia

[2] YCHARTS

[3] Dimensional Funds 2021 Matrix Book

Buy Bonds?

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Buying bonds is the ultimate contrarian play because everyone knows interest rates are rising, and when rates rise, bond prices fall. The yield on the 1-Year US Treasury increased 1,528% over the past year, while the yield on the 10-Year US Treasury “only” jumped 64%. All rates along the yield curve have increased substantially, and they will probably continue to rise.  

In 1990, long-term interest rates reached 9%, and I could not give bonds away since investors were convinced rates were going higher because, in the 1980s, they touched 15%. However, rates declined from 1990 to 2020, falling to a low of  .62% – a drop of 93%. The ultimate bull market in bonds occurred from 1982 to 2020.

A 30-year bond will fall 19% if interest rates rise from 2% to 3% – not a compelling argument to buy bonds. And the higher rates go, the lower prices will fall. We sold most of our long-term bond holdings in March 2020 as yields pushed below 1%, and we shortened our maturities to about two to three years and realized gains while transitioning to a defensive position. As interest rates rise, we will extend the maturities of our bond holdings to capture higher yields.

If rates rise, is there a bond strategy that makes sense? I believe there is, and it’s called a bond ladder. A bond ladder works in a rising or falling interest rate environment, and as rates rise, a bond ladder allows you to generate more income.

Here is how it works. You purchase a three-year bond ladder with bonds maturing in one, two, and three years and they pay 1%, 2%, and 3%, respectively.

  • Bond 2023 pays 1%
  • Bond 2024 pays 2%
  • Bond 2025 pays 3%
  • Average yield = 2%

When the 2023 bond matures, the remaining bonds are now one-year closer to maturity. You now purchase a new three-year bond maturing in 2026, paying 3% with the proceeds from the 2023 bond. Your new ladder now looks like this:

  • Bond 2024 pays 2%
  • Bond 2025 pays 3%
  • Bond 2026 pays 3%
  • Average yield = 2.6%

Your income increased from 2% to 2.6% or 30%.

When the 2024 bond matures, the remaining bonds are now one-year closer to maturity. With the proceeds from the 2024 bond, you buy a 2027 bond, paying 3%. Your new ladder now looks like this:

  • Bond 2025 = 3%
  • Bond 2026 = 3%
  • Bond 2027 = 3%
  • Average yield = 3%

Your income increased by 15%.

Your bond ladder can consist of any maturity from one to thirty years, depending on your appetite for risk. Eventually, your ladder will contain higher-yielding long-term bonds with monthly, quarterly, or annual liquidity.

A physical ladder will take you higher with each rung you climb, and a bond ladder can produce higher income as you purchase new bonds. In addition to higher yields, buying bonds can protect your principal if stocks fall, especially if you own short-term bonds. For example, the NASDAQ is down 9.3% this year, while short-term Treasuries are only down 1.57%.

If interest rates continue to rise, you will have the opportunity to buy bonds at a discount, increasing your total return. For example, if you buy a 10-year bond with a 2% coupon at $100, your current income and yield-to-maturity will be 2%. If rates rise by 2%, the price could fall to $84. If you purchase the bond at $84, your current yield jumps to 2.4%, and the yield-to-maturity increases to 3.9%. It pays to buy bonds at a discount. One person’s trash is another person’s treasure.

What is the top for inflation and interest rates? I don’t have a clue, nor does the Federal Reserve. No one can predict where inflation or interest rates are going. If interest rates continue to rise, consider adding bonds to your portfolio so you can generate more income.

As I mentioned, buying bonds is the ultimate contrarian play because everyone knows interest rates are going higher, but what if everyone is wrong? What if rates don’t rise? What if inflation falls? If you buy when others are selling, you could make money with your shrewd investing skills. Who knows?

Bye, bye and buy bonds.

Bond selection is primarily a negative art. It is a process of exclusion and rejection, rather than of search and acceptance. ~ Benjamin Graham

February 11, 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.

Should You Pay off Your Mortgage?

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Interest rates are near historical lows, so does it make sense to pay off your mortgage? Eliminating debt is satisfying, but should you sell stocks or bonds to make it happen? Let’s explore a few options.

Pay off your mortgage

  1. If your cash balance at your bank is high, it’s wise to pay off your mortgage because cash earns nothing. Current mortgage rates are 3.11%, significantly higher than the 0% you’re making from your bank.
  2. Do you plan to retire in the next few years? If so, eliminate your mortgage. Housing is a considerable expense for retirees, even if you’re debt-free. Property taxes, upkeep, and maintenance are not cheap, so removing one more payment is prudent.
  3. Can you commit to investing monthly for twenty or thirty years? If so, pay off your mortgage. The monthly payment for a $500,000 home is approximately $1,700. Investing $1,700 per month for thirty years could grow to more than $3.8 million.
  4. If it brings you peace and reduces your stress, pay it off regardless of the math.

Do not pay off your mortgage.

  1. Do not pay off your mortgage If you expect inflation to rise. In fact, I would recommend borrowing more money because rates are low, but they will increase as inflation climbs.
  2. If your investments earn more than 5% per year, paying off your mortgage does not make sense. Your gross return could drop by 1% to 2% per year, depending on your tax bracket. For example, if you’re in the 32% tax bracket and earn 5%, your after-tax return could fall to 3.4%. When calculating your return, include all your taxable assets, including stocks, bonds, and cash. Do not cherry-pick your best investments.
  3. If you expect to move in the next few years, do not pay off your mortgage. Instead, keep your investments as a safety net or apply them to your new home.

The stock market has soared the past ten years, so letting your investments grow is smart. However, there have been several periods where stocks have not performed well, like 2000 to 2013, where the S&P 500 fell about 3%. We are not promised tomorrow, and returns are fleeting, but expenses are forever.

“Creditors have better memories than debtors.” ~ Benjamin Franklin

January 10, 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.

Bye bonds or buy bonds?

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I started my investment career in 1989 when the 30-Year US Treasury Bond yielded more than 8%. Investors were reluctant to buy bonds because they worried interest rates were going higher. They remembered the double-digit yields from 1979 to 1985; convinced interest rates would climb again, they kept their money in cash. Thirty-two years later, they are still waiting for rates to rise. 

Today, interest rates are a fraction of where they were many years ago, and investors are still focused on rising rates. Reluctant to buy bonds for fear of missing a rate rise or losing principal, they keep their money in cash or a money market with a near 0% yield waiting for the Fed to raise rates. Though rates are low, investors should not ignore the safety, and income bonds provide to a portfolio. 

In the October 1, 2015 issue of Fortune Magazine, Josh Brown of Ritholz Wealth Management outlines a compelling case for owning bonds. He suggests allocating a portion of your portfolio to bonds to help “cushion a portfolio for down years.” Adding that stocks and bonds have only had three times where their returns were both negative – 1931, 1941, and 1969. He suggests investors should ladder their bond portfolio, which will help investors with “a built-in-defense mechanism against a gradually rising interest rate.”

In fact, when stocks fell in 2002 and 2008, bonds performed well. In 2002 stocks dropped 22.1%, bonds rose 17.8%. In 2008 stocks were fell 37%, bonds climbed 26%.

So, I would recommend giving bonds another look.  

Bye, bye and buy bonds.

I would never be 100 percent in stocks or 100 percent in bonds or cash. ~ Harry Markowitz

November 10, 2021

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

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

Rates are rising! Buy bonds?

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The Federal Reserve might raise interest rates next year. They last hiked interest rates in 2018, raising the fed funds rate four times from 1.50% to 2.50%. The relationship between bond prices and interest rates is like a see-saw in a park; when one side rises, the other side falls. If interest rates are rising, why would you buy bonds?  A rate rise will indeed disrupt prices. However, disruption is where bond buyers can find opportunities.

The 30-Year US Treasury Bond yields 2.09%. If interest rates rise one percent, the price will fall 19.4% from $100 to $80.62. If you purchase the bond at $80.62, you have an opportunity to earn 24% when it matures to $100. In addition, the current yield improves to 2.6%. Since 1926, long-term government bonds have produced an average annual return of 5.8%.[1]

Bond and bond funds are considered lousy investments when interest rates rise. However, investors assume, incorrectly, that fund managers do nothing while rates are rising. When rates rise, fund managers buy bonds at lower prices while locking in higher rates. Eventually, lower bond prices and higher coupons will benefit shareholders.

The Franklin U.S. Government Securities Fund (FKUSX) originated in May 1970, and since its inception, it has delivered an average annual total return of 5.85%. Its best year was 1982, returning 33.04%, and its worst year was 1980, losing 12.87%. A $100,000 investment in May 1970 is now worth $1,827,300.[2]

When rates rise, the first reaction for bondholders is to sell. When they sell, it creates buying opportunities for investors with a long-term time horizon. You can take advantage of panic sellers by purchasing bonds at favorable prices. Their pain will be your gain.

Why buy bonds when interest rates climb? 

  • Lower prices
  • Higher yields
  • Better total return
  • More bond investment choices

Don’t fear a rate rise. It will treat you well in the long run.

“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity.” ~ John F. Kennedy.

October 23, 2021

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

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

[1] Dimensional Fund Matrix Book 2021.

[2] YCharts

Should You Own Bonds?

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Long-term interest rates are near historic lows. In 1981, rates peaked at 15.32%; today, they’re 1.37% – a drop of 91%. The yield on the US 10-Year Treasury Note is currently 1.3%, and the inflation rate is 4.99%, so if you bought a bond today, your real rate of return is negative 3.69%. Negative interest rates aren’t too compelling.

Investors buy bonds for income and safety, especially in retirement, as stocks are considered risky investments. Bondholders have enjoyed generous returns since 1981 as interest rates fell because when interest rates drop, bond prices rise. For example, if you buy a 30-year bond for $100 paying 5%, and interest rates fall to 2%, the price of your bond would soar to $229. Bond fund managers have enjoyed a one-way trade for the past forty years, but now that rates are near all-time lows, is the party finished? And if the party is over, does it make sense to own bonds in your portfolio?

In 1982 bond prices soared 40%. It was the beginning of the end for bondholders; it just wasn’t evident yet. If bonds continue paying real negative rates, are they safe? When interest rates start to rise, bond prices will fall. For every 1% interest rates rise, the price of a 30-year bond will lose 16%.

However, don’t be quick to jettison your bonds. During the lost decade of 2000, bonds outperformed stocks by nearly 90%. Vanguard’s Total Bond Index rose 80%, while the S&P 500 lost 10%. Bonds can add protection to your account when stocks crash. If you have a balanced portfolio, you can sell your bonds to buy stocks. For the most part, bonds and stocks are negatively correlated – when one rises, the other falls.

Also, adding bonds to your investment accounts will lower your risk level. According to Riskalyze, a 100% stock portfolio dropped 53.1% during the Great Recession, whereas a portfolio consisting of 60% stocks and 40% bonds fell 34.2%, or 36% less than the all-stock portfolio. So, if you want to reduce risk in your portfolio, add bonds.

Most of us already own a substantial bond portfolio in the form of Social Security. For example, if you receive $24,000 in annual benefits, this is equivalent to owning a $2.4 million bond portfolio if interest rates are 1%. Also, your Social Security benefits increase with the cost of living. Last year the adjustment was 1.3%, and in 2022 it may climb 6.1% – the most in forty years![1] If you consider Social Security as part of your portfolio, it reduces the need to own bonds.

Few people have the stomach to handle an all-stock portfolio, especially during challenging market environments like the crash of 1987, the Tech Wreck, the Great Recession, or the Covid Correction. It’s easy to hold stocks when they rise 10% to 20% per year, not so much when they fall 40% or 50%. When investors are scared, and fear is high, they sell stocks to buy bonds. As they say, anybody can sail a ship when the seas are calm.  

I still recommend diversified portfolios because no one knows which asset class will perform well in any given year. Diversifying your assets across sectors is still a prudent strategy, but think about reducing your bond allocation if you’re a long-term investor with diamond hands and a strong stomach.

“Confronting a storm is like fighting God. All the powers in the universe seem to be against you and, in an extraordinary way, your irrelevance is at the same time both humbling and exalting.” ―Francis LeGrande

July 14, 2021

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

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

[1] https://www.cbsnews.com/news/social-security-cola-2022-increase-biggest-nearly-40-years/, Aimee Picchi, July 13, 2021

Fear the Fed?

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The market dropped last week because the Federal Reserve hinted they may raise interest rates in 2023, two years from now.  The Dow Jones fell about 3% as the topic of rising interest rates covered the airwaves.  The Federal Reserve also published their dot plot chart, a chart of where their members expect interest rates to be over the next few years, and several members expect rates to rise above 1.5%. Should we be concerned?

In 1994 and 1995, the Federal Reserve raised interest rates seven times, from a low of 3.25% to a high of 6%. From February 4, 1994, to February 1, 1995, interest rates jumped 85%.[1] What happened to the stock market? In 1994 the S&P 500 rose a paltry 1.3%, but it did not fall. However, in 1995 the index soared 37.6%.

From 1999 to 2000, the Federal Reserve hiked interest rates six times from 5% to 6.50%. The S&P 500 rose 21% in 1999, but it dropped 9.1% in 2000.

From 2004 to 2006, the Federal Reserve boosted interest rates seventeen times! On June 30, 2004, the Fed Funds Rate sat at 1.25%, and on June 29, 2006, it swelled to 5.25%, an increase of 320%. Despite several rate spikes, the S&P 500 rose 10.9% in 2004, 4.9% in 2005, and 15.8% in 2006.

From 2015 to 2018, the Federal Reserve increased interest rates nine times, climbing from .25% to 2.50% or 900%. The S&P 500 rose 1.4% in 2015, 12% in 2016, 21.8% in 2017, and it dropped 4.4% in 2018.

Rising interest rates are a sign of a robust economy and, potentially, higher inflation. Rising interest rates and higher inflation spells trouble for stocks. If rates rise high enough, investors will sell stocks to buy bonds or park their cash in a money market fund. For example, some investors would prefer to earn a safe 5% from a bond rather than risk their capital in the stock market.

Lately, though, long-term interest rates are falling. The Federal Reserve can only regulate the Fed Funds Rate, whereas the market (investors) control everything else, including longer-dated bonds. For the past three months, yields on the US 10-Year Treasury Note and the US 30-Year Treasury Bond are each down more than 15%. If investors are nervous about rising interest rates or inflation, the bond market is telling us otherwise.

Wayne Gretzky once said he’s successful because he skates to where the puck is going, not to where it has been. He is the rare athlete who sees plays develop before others. But Mr. Gretzky is not on the Federal Reserve Board, and predicting the direction of interest rates is hard; trying to identify the actual rate is impossible.

Jamie Dimon, the CEO of JP Morgan Chase, said in 2019, “We’ve actually been effectively stockpiling more and more cash, waiting for opportunities to invest at higher rates,” Dimon said during a virtual conference held by Morgan Stanley. “So our balance sheet is positioned (to) benefit from rising rates.” At the time of the quote, his firm was sitting on $500 billion in cash, waiting for interest rates to rise.[2] What happened? The CBOE Interest Rate Composite Index fell 98.57% over the next two years! If Mr. Dimon can’t predict the direction of interest rates, who else can?

The effective Federal Funds Rate is currently .06%. The 67-year average has been 4.74%, so who cares if it rises a percent or two? I don’t.

When the market falls again because of rising interest rates, use it as an opportunity to buy great companies at discounted prices. Since February 4, 1994, the S&P 500 is up 797%, or 8.34% per year, despite several corrections. A $10,000 investment grew to $89,740!

Rather than waiting for the Federal Reserve to hike interest rates in two years, diversify your portfolio, follow your plan, save your money, and invest often.

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” ~ Henry Ford

June 21, 2021

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

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

[1] https://www.federalreserve.gov/monetarypolicy/openmarket_archive.htm

[2] https://www.reuters.com/business/finance/jpmorgan-stockpiling-cash-waiting-interest-rates-rise-ceo-2021-06-14/, Jeenah Moon, April 9, 2019

Fear Rising Rates?

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Investors fear rising interest rates. Since the start of the year, the 10-Year US Treasury yield is up 66% to 1.54%. It’s still low, but the speed at which it climbed is worrying investors. For the past fourteen years, the yield on the 10-Year averaged 2.33%. The high was 4.01%, the low was .52%. Does it make sense to sell stocks as rates are climbing? Maybe.

Let’s look at rate spikes during this cycle. Despite several rate spurts, the S&P is up 373% since 2008. If you bought stocks during the previous rate spikes, you’re probably sitting on nice gains today. Though we have experienced volatility in the bond market, the trend for interest rates over the years has been down.

  • The yield soared 67% from December 2008 to June 2009.
  • The yield jumped 50% from October 2010 to February 2011.
  • The yield climbed 49% from May 2013 to September 2013.
  • The yield rose 68% from July 2016 to January 2017.
  • The yield increased 54% from August 2017 to November 2018.

During the above rate spikes, stocks rose with an average gain of 11% – counter to what typically happens when rates rise.

Stocks are sensitive to interest rates. When they rise, stocks fall, and vice versa. It’s been this way for centuries. Rates threaten stocks when elevated because investors can buy bonds to realize a safe and sometimes guaranteed return. When will rates be a menace for stocks? I believe the rate threshold is 5%. A 5% guaranteed return for many will be difficult to pass up, and investors will sell stocks to buy bonds.

Additional buyers for our bonds are wealthy foreign investors and foreign governments since our rates are high relative to other countries. Here’s a look at global 10-year government bonds.[1]

  • Germany = -.274%
  • UK = .755%
  • Japan = .0122%
  • Australia = 1.786%
  • China = 3.27%
  • France = -.036%
  • Italy = .75%
  • Spain = .406%

Our rates are in line with Australia’s, but lower than China’s. However, foreign governments and wealthy investors likely will choose our market because of our safety and liquidity. As our rates climb, the money will flow into our bond market, keeping a lid on rising rates.

Rising rates may benefit your portfolio, especially if you carry a large cash balance. As rates rise, so will the yield on your money market or savings accounts. Another way to benefit is through a bond ladder. Buying bonds with different maturities can preserve your liquidity while capturing higher yields. Also, if interest rates are rising, it means our economy is doing well. And, a strong economy will benefit many.

If stocks fall because our rates are rising, I recommend buying the dip as a correction may be short-lived.

Don’t fear rising rates – for now!

Everything you want is on the other side of fear. ~ Jack Canfield

March 8, 2021

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

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

[1] https://www.barrons.com/market-data/bonds?mod=md_subnav, website accessed March 8, 2021

Rising Rates

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Interest rates are rising. Year to date, the yield on the US 30-Year Treasury bond is up 24%, and from the July low, it has risen 75%. Though rates are near historical lows, they can rise quickly. When rates rise, bond prices fall, and at some point, they will threaten stocks as investors search for decent returns with less risk. Interest rates remained below 5% from 1875 to 1966 before climbing to 15% in October 1981.[1] The 146-year average is 4.52%.

I don’t anticipate rates to approach 15%, but small, upward movements can damage a bond portfolio. A 30-year bond will fall by 19.5% if rates rise 1%. The iShares 20+ Year Treasury Bond ETF (TLT) is down 5.2% this year. Rising rates are not all bad, however. Individuals with large cash balances should see their rates rise on their accounts.

How can you protect your portfolio or take advantage of rising interest rates? Here are a few suggestions.

  • Deposit more money to a money market fund. The rate of interest you earn on your money market fund will increase without lowering your fund’s price.
  • Invest in short-term US Treasuries or CDs with maturities of six months or less. The short term duration will allow you to capture higher rates when they mature.
  • Invest in a bond ladder with maturities of one year or less.  A recommended bond ladder is to purchase US treasures with three-month maturities, so bonds come due at 3-, 6-, 9-, and 12- months. This ladder gives you liquidity and flexibility.
  • Sell your long-term bonds with maturities of twenty to thirty years. If you own long bonds, you probably have significant gains. Sell your bonds, lock in your profits, and buy shorter-dated bonds. However, if you need the income from your bonds, don’t sell. I know it’s a contradiction, but one is a risk reduction strategy, the other is an income strategy.
  • Buy a bond fund with a duration of one to five years. The short-term holdings in the funds will fare better than long-term securities if rates rise.
  • Purchase high-quality corporate bonds. Corporate bonds offer higher rates than CDs or treasuries because they are not guaranteed.
  • Invest in tax-free municipal bonds with short-term maturities. In addition to protecting your assets, you will receive tax-free income. If tax rates rise, your after-tax rate will increase. For example, a 3% taxable bond equates to a 4.76% bond for individuals in the 37% tax bracket.  
  • Purchase an inflation-protected bond fund. The iShares TIPS bond ETF (TIP) is up 8% over the past year.

Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is very low gravitational pull on asset prices. ~ Warren Buffett

February 10, 2021

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

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

[1] https://ycharts.com/indicators/us_longterm_interest_rates