Five Investment Ideas for 2022

The S&P 500 is up 21% for the year, but it’s limping to the close. The Omicron variant and rising inflation have forced some investors to the sidelines. US stocks, especially large-cap growth stocks, have been stellar investments for the past few years, but will this trend continue? Below are my five best sector bets for 2022.

Small-Cap Value

Small-cap value stocks have underperformed large-cap growth stocks on a 1-, 3-, 5-, and 10-year basis. Large-cap growth stocks have been up more than 600% for the past decade, while small-cap value stocks returned 176%. The sector is currently trading at a discount to large-cap companies, so hopefully, the tide will turn soon.  Vanguard’s Small-Cap Value ETF (VBR) is an excellent way to invest in this category.

International Companies

International stocks have lagged US companies for the past decade by a wide margin. The S&P 500 is up 279%, while the EAFE Index is up a paltry 59%. The return differential has created a wide discount for international companies. A popular investment fund for this category is the iShares MSCE EAFE ETF (EFA).

Emerging Markets

Emerging market stocks have barely budged relative to US companies, especially if they have significant exposure to Chinese companies. If you anticipate inflation to continue, emerging markets could perform well as most of these counties have substantial natural resources. The iShares MSCI Emerging Markets ex-China ETF (EMXC) is an excellent way to invest in this sector.

Home Builders

Homebuilders performed well in 2021, but the trend should continue as millennials and first-time homebuyers flood the market. In addition, a shortage of housing and low rates will continue to fuel the boom. The iShares US Home Construction ETF (ITB) and SPDR® S&P Homebuilders ETF (XHB) are two good investment options for this sector.

Industrial and Material Stocks

Despite Senator Joe Manchin hammering the Build Back Better Bill, our country needs a more robust backbone, including Wi-Fi, roads, rails, and airports. I don’t know what the eventual bill will look like, but our infrastructure needs fixing. A few funds in this sector include the Vanguard Industrials ETF (VIS), Industrial Select Sector SPDR® ETF (XLI), and iShares US Industrials ETF (IYJ).

Markets are in a constant state of flux, so make sure you follow your plan and diversify your assets. A well-balanced portfolio of low-cost index funds exposes you to all the sectors mentioned above.

Successful contrarian investing requires us to live with a discomfort, for being wrong and alone. But bargains do not exist in the absence of fear. ~ Rob Arnott

December 20, 2021

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.

Do you remember March 24, 1980?

Do you remember March 24, 1980? I don’t. I was 15. I was probably concerned with three things. Was I going to the beach? Were the Dodgers going to win? Where were my friends and I going to eat lunch? I probably went to the beach, the Dodger’s undoubtedly won, and I most likely went to McDonald’s.

On March 24, 1980, the S&P 500 fell more than 3%, and I am sure the morning newspaper headlines were full of doom and gloom. The index would drop 17% in six weeks, but it finished the year up 26%.

If you bought the dip on that day and currently own the S&P 500, you’re up 4,230% – a  $10,000 investment is now worth $433,000.

I mentioned I probably ate lunch at McDonald’s. What if you bought the stock on that same day? If you gobbled up $10,000 worth of McDonald’s stock, your original investment is now worth $2.7 million, producing an average annual return of 14.5%!

I  believe in the buy-and-hold strategy because it’s impossible to time the markets. When markets drop, it allows you to invest in great companies at lower prices. It is similar to flying. The only way to get on an airplane is when it is on the ground. You lose if you are not on that plane when the pilot leaves the gate and roars down the runway.

However, I realize not everybody has the confidence to buy stocks during a market meltdown, so here are a few suggestions to help strengthen your portfolio.

  • If you need your money in one year or less, do not invest in stocks. Instead, keep your money in cash or savings account, US T-Bills, or certificates of deposit.
  • If you’re retiring in three to five years, keep three years’ worth of expenses in cash, US T-Bills, or certificates of deposit. For example, if your annual costs are $100,000, allocate $300,000 to cash or cash equivalents.
  • If you are concerned about the international turmoil, invest in small or mid-cap companies headquartered in the United States. Small companies typically do not have much international exposure.
  • Add dividend-paying stocks to your portfolio. According to YCharts, over 1,500 companies are yielding 2% or more. The current yield on the 30-Year US Treasury is 2.04%.
  • Asset allocation and diversification still work. A balanced portfolio of stocks, bonds, and cash will perform well over time. Since 1980, a balanced portfolio of 60% stocks, 40% bonds generated an average annual return of 11.4%.[1]
  • If your holding period is three to five years or more, let your stocks run.

Current markets are volatile and not fun, but this can be an opportunity for you to reexamine your investment and financial goals to make sure they align with your long-term financial plan.

Be on your guard, stand firm in the faith; be courageous; be strong. 1 Corinthians 16:13.

October 4, 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] DFA Returns Web Tool – 1/1/1980 to 09/30/2021

The Best Investment Strategy Ever!

Investors want an edge, a shortcut to wealth. What strategy works best? Who has the hot hand? How can I make money? Today, there is no shortage of podcasts, videos, blogs, vlogs, newsletters, posts, or tweets offering investment guidance. A Google search for investment advice yielded about a billion results.  CNBC dedicates most of its programming to the stock market. Reddit and WallStreetBets are introducing a new generation of investors to the wonderful world of stock trading. Bitcoin speculators with laser beam eyes trumpet their financial success by buying and selling digital currencies. There are many ways to make money in the stock market, so how can you find the best one?

I’ve read hundreds of investment books about investing learning from the legends like Warren Buffett, Peter Lynch, William O’Neil, Bill Miller, John Rogers, and so on. They have different investment strategies, and all of them are successful. Regardless of their style, they’re profitable because they follow a disciplined process and think long-term.

However, the best investment strategy that yields the most fruit is saving money. If you can save your money, you can prosper financially. It’s not hard to save 5%, 10%, or 20% of your salary, but few people do it. Building your nest egg takes time and discipline.  By saving a few hundred dollars every month, your nest egg may be worth a few million dollars by the time you’re ready to retire. For example, saving $500 per month and investing it in the stock market could be worth more than $1 million in thirty years. In forty years, it climbs to more than $3 million![1]

What if you don’t want to wait thirty or forty years? Let’s say you want to buy a new car in five years or a home in ten? Well, saving money is still the best way for you to reach these goals. For example, if you save $500 monthly for five years, it will be worth close to $39,000, enough to buy a new car. After ten years, it will be worth $102,000, enough for a downpayment on a $500,000 home.

I work with a young couple who save regularly and are now able to buy a new home. They started looking for their dream home about a month ago. Another client has contributed the maximum to his 401(k) plan for his entire career, and he can retire early.

Saving money takes effort. It’s not easy, especially when life gets in the way, but you need to find a way to save as much as you can. Money in the bank gives you the freedom to choose your path and lessen your dependence on others.

I’ve talked to numerous individuals about investing, and some people are spendthrifts, and money burns a hole in their wallet -money in, money out. People who live for today are like the grasshopper in The Ants & the Grasshopper from Aesop’s Fables[2]. Here is the story:

One bright day in late autumn a family of Ants were bustling about in the warm sunshine, drying out the grain they had stored up during the summer, when a starving Grasshopper, his fiddle under his arm, came up and humbly begged for a bite to eat.

“What!” cried the Ants in surprise, “haven’t you stored anything away for the winter? What in the world were you doing all last summer?”

“I didn’t have time to store up any food,” whined the Grasshopper; “I was so busy making music that before I knew it the summer was gone.”

The Ants shrugged their shoulders in disgust.

“Making music, were you?” they cried. “Very well; now dance!” And they turned their backs on the Grasshopper and went on with their work.

Moral: There’s a time for work and a time for play.

The Bible also comments on the ant in Proverbs 6:6-11: Go to the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest. How long will you lie there, you sluggard? When will you get up from your sleep? A little sleep, a little slumber, a little folding of the hands to rest— and poverty will come on you like a thief and scarcity like an armed man.

Did you notice the last verse? It read: poverty will come on you like a thief. Saving money provides provision and a financial future. On the other hand, if you don’t save your money, there can be dire consequences. Also, if you don’t save money, you can’t buy stocks, bonds, Bitcoin, or any other investment.

To increase your odds of investment success, automate your savings. Set up a monthly draft to your savings account, brokerage account, and company retirement plan. If you get a raise, increase your savings by the same percentage: a 2% raise, a 2% increase in savings.

Money compounds over time, so the sooner you start, the better. If you’re not sure how much to save, start small and increase it over time. Don’t delay; start today! I know you can do it!

Do not save what is left after spending, but spend what is left after savings. ~ Warren Buffett

May 22, 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] $500 monthly investment at 10% before taxes and fees.

[2] http://read.gov/aesop/052.html

A Day At The Races

I spent last Sunday at the races with my mom and daughter. We had a great time despite the cold and drizzly weather. We arrived early, stayed late, and bet often.

I grew up near the Santa Anita racetrack. My high school was across the street, so I was a frequent visitor. In addition, my daughter has been riding horses since she was five, so it’s a sport we bond over.  

After downloading the daily racing forum, we examined each horse’s sires and dams and spent the evening handicapping the horses. We reviewed their previous workouts, race performances, owners, and trainers. At the racetrack, we got the official daily racing program that includes some data on the horses and riders. We were ready.

On race day, we bet on our selected horses. Our strategy and system worked well as we finished in the money for seven of the nine races. We hit an exacta in the eighth race and missed another by a nose in the sixth.

We bet conservatively for most races, but when we felt convicted, we upped the ante and pressed our bets. We felt confident in our system because we spent time doing our homework. If we only relied on the official program, we would have performed poorly. It would have been a guessing game, picking horses based on the jockey’s colors or some other random item.

At times it appears people pick investments based on random facts or data points that won’t move a stock’s price. Rather than doing their research, they choose investments from a tweet, text, or tik-tok video. If you hear about a stock on CNBC, it must be a good investment. Right?

Don’t leave your financial future to chance. Instead, take time to learn something about your investments. Here are a few tips you can use to increase your odds of success.

  • If you’re buying a stock, review the company’s mission statement, financials, price charts, and competition. Yahoo! Finance is an excellent data source. Digging into a company’s financial history can give you an idea of its future.
  • If you’re buying a mutual fund or ETF, review the fund’s objectives, managers, expense ratios, holdings, and the other funds in the category.
  • How much can you invest? Do you want to own several stocks, or do you want to place your bets on a few long-shots? If you have buckets of money, you can own many companies. However, if your resources are limited, owning a mutual fund is more prudent.
  • What is your risk management strategy? Will you let your winners run? Will you sell your losers? Will you buy the dip? Create a plan and follow it. Don’t let your emotions ruin your portfolio.
  • Review your trades, especially if you lost money. Why did your investment fail? What happened? How can you improve your trading based on your experiences? For example, in the sixth race, we lost an exacta because our horse came in third, not second. After the race was over, I reviewed our process to see if we missed anything. We didn’t. Our horse was solid; it just got beat.
  • Celebrate your success. If you made money on a trade, take a few chips off the table and celebrate your win. It’s okay to spend your winnings on things you enjoy.

If you’re inclined to work harder than the next person, you can win at the races, in the markets, and life. Unfortunately, few people are willing to go the extra mile, but I know you can do it. I’m betting on you to win!

And away they go!

A good rider can hear her horse speak to her. A great rider can hear her horse whisper. ~ Anonymous.

“Do you give the horse its strength or clothe its neck with a flowing mane?Do you make it leap like a locust, striking terror with its proud snorting?It paws fiercely, rejoicing in its strength, and charges into the fray.It laughs at fear, afraid of nothing; it does not shy away from the sword. The quiver rattles against its side, along with the flashing spear and lance. In frenzied excitement it eats up the ground; it cannot stand still when the trumpet sounds. At the blast of the trumpet it snorts, ‘Aha!’ It catches the scent of battle from afar, the shout of commanders and the battle cry.” ~ Job 39:19-25

May 19, 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.

Grandma’s House

Hannah loved visiting her grandparent’s cabin in the mountains of Colorado. She especially enjoyed sitting on the river’s edge listening to her Nana’s stories.

“Nana,” Hannah said, “Tell me the story where you beat up the stock market.”

“Little Bird, I didn’t beat up the market; I beat the market.”

“What’s the difference?”

“Well, for one, you can’t beat up something you can’t see, and beating the market means our investments performed well over time, generating favorable returns.”

“I see. I guess. How did you know what to buy?”

“When your Tata and I got married, we had little money, but we were good savers. We started buying a few shares of companies we liked. We called it investing with our eyeballs and our checkbooks.”

“Cool. What’s a checkbook?”

“Ha, ha, Little Bird, you’re too funny. In the old days, before credit cards, PayPal, and Venmo, we wrote checks for things we bought.”

“I get it. I think. I’ve never heard anybody invest with their eyeballs before. What do you mean?”

“Well, for example, when we went to McDonald’s to buy your mom’s dinner, we noticed that the lines were long, and the lobbies were crowded.  When we shopped at Sears, the aisles were full of shoppers.”

“Sears?”

“You probably won’t believe this, but at one time, Sears was larger than Amazon. The Sears catalog was huge, and you could purchase anything from a house to a muffin pan.”

“No way. I’ve never heard of them. Where are they now?”

“They’re a former shell of themselves. Amazon evaporated its business model.”

“What other companies did you own that are no longer around?”

“When we started investing in the 1970s, we owned some of the largest companies in the world like Eastman Kodak, Xerox, and Revlon. These companies are barely alive today. We also rented videos from Blockbuster.”

“You actually had to go to a store to rent a video to watch a movie?”

“Yes, it’s not like today where you can watch a movie on Netflix. Netflix destroyed Blockbuster. There’s only one store left, and it’s in Bend, a small ski town in Oregon.”

“Wow. So you didn’t make money on every stock?”

“No. We lost money on several companies over the past fifty years, but our winners outpaced our losers by a wide margin. Our investments in McDonald’s, Home Depot, Apple, Amazon, and Tractor Supply have done very well.”

“I love Tractor Supply!”

“I know you do!”

“If you’ve done well, how come you don’t have big homes and fancy cars? My friend’s parents seem to buy new cars all the time.”

“Your Tata and I decided it was better to live modestly and invest our money in stocks and experiences. Our simple strategy allowed us to buy this cabin to spend more time with you and your cousins. Besides, who wants to clean a big house?”

“My friend’s parents are in a hurry to get rich, and they always talk about money. How come you and Tata don’t seem to be in a hurry to get rich?”

“Well, Little Bird, do you see the river?”

“Yes.”

“The river is in no hurry to get where it’s going. Sometimes it goes fast, sometimes slow, but it’s never in a hurry. It also knows where it’s going, twisting and turning through the countryside, enjoying the journey. We’re like the river. We know where we’re going, but we’re in no hurry to get there. We, too, are enjoying our journey.”

“I see. I guess.”

“When you hurry, you make mistakes or miss opportunities. Our motto is ‘never hurry, never worry.'”

Hannah pondered her next question and asked, “Do you own Bitcoin?”

“We don’t understand Bitcoin. Your Tata and I decided to only invest in things we know and understand. We have also avoided fads over the years.”

“What fads?”

“Well, in the late 1990s, people were trying to get rich buying dot com stocks – companies with no earnings, no profits, no future. When the stock market crashed in 2000, several of our friends lost a lot of money, and a few got wiped out. I don’t know if Bitcoin is a fad or not; too early to tell. We also avoided pet rocks and beanie babies.”  

“Rocks and beanie babies, what the heck?”

“We can talk about those some other time.”

“Okay, when will you know if a fad is a real thing?”

“Probably in ten or twenty years.”

“That’s a long time, Nana.”

“It is, but your Tata and I are patient, and we can always buy it later. We invest in good companies, and most of our stocks pay a dividend.”

“What’s a dividend.”

“A dividend is a payment we receive from the companies we own. For example, McDonald’s sends us a quarterly check for more than $5,000. The annual dividend we receive is larger than our original investment!”

“Wow! Do I need a lot of money to buy stocks and collect dividends?”

“Of course not. We started small, buying five shares here and ten shares there, and over time, it added up.”

“So I can invest some of my money, and it will grow yours did?”

“Do you see the tall aspen trees?”

“Yes, they look like they have eyes.”

“Do you think they started big or small?”

“Small. Nothing starts off big, except elephants and whales.”

“Yes, silly goose, you’re right.”

“These big aspen trees were seedlings, and then they grew towards the sky. Tata and I started with small investments, and we let them grow over time.”

“Nana, you’re the best storyteller ever. Can we have a snack and then ride the horses?”

“We sure can. Let’s get some chocolate chip cookies and grab the horses. I’ll ride Salty Sailor, and you can ride Sage.”

“Let’s do it!”

Moral: Invest in what you know and think long-term.

April 19, 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.

Why Worry?

As the market climbs higher, investors are worried about a correction. Just because stocks go up, does it mean they must come down? Of course, stocks fluctuate daily. They rise and fall as they react to reports or headlines or opinions.  Since 1970, the S&P 500 has finished a calendar year in positive territory 82% of the time. Over the past 50 years, the index has been up 41 years and fallen nine.  The average gain was 18.5%; the average loss was 15%. And, year-to-date, it’s up 9.90%.[1]

During the same time frame, there have been seven bull markets with an average gain of 294% and an average duration of 77 months.  There have also been nine bear markets with an average drop of 32% and an average length of nine months.[2]

If you are worried about a stock market correction, then consider adding bonds to your portfolio. In the chart below, the S&P 500 fell 31% last March. Let’s compare the all-stock index to three different globally diversified portfolios.[3]

  • The seventy portfolio is 70% stocks and 30% bonds and cash. During the COVID correction, it fell 26.5%, or 14.5% less than the market.
  • The sixty portfolio is 60% stocks and 40% bonds and cash. During the COVID correction, it fell 23.5%, or 24% less than the market.
  • The fifty portfolio is 50% stocks and 50% bonds and cash. During the COVID correction, it fell 19.5%, or 37% less than the market.

By November, the market and all three portfolios recovered their losses and were profitable for the year. The index is 100% stocks, so it makes sense it fell further and recovered faster than the globally balanced portfolios.

Regardless of your risk tolerance, a hefty allocation to stocks can give your wealth a boost. Do not let short-term pain get in the way of long-term gains.

April 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] Dimensional Fund Advisors 2020 Matrix and YCharts

[2] Ibid

[3] Ibid

The NCAA Tournament and Investing

It’s finally here! The greatest sporting event is back after last year’s hiatus. Though fans, bands, cheerleaders, and mascots are missing, it’s still exciting to watch. My family and I look forward to competing against each other with our brackets, and I always participate in ESPN’s Tournament Challenge, hoping that I will be the one with the perfect bracket. However, after Oral Roberts beat Ohio State, I’m out, and so are 95% of the other participants. Picking winners is not easy. The odds of a perfect bracket is 1 in 9,223,372,036,854,775,808. If you know something about basketball, your odds improve to 1 in 120 million.[1]

According to ESPN, there are 108 perfect brackets out of 14.7 million submitted or .000735% after the opening games. And 93 participants lost every game! Is this an ideal bell curve? I rank 8.9 million after selecting nine winners, so I still have a chance. My choice to win it all is Baylor because they’re a good team, and it’s my daughter’s alma mater. I’m also rooting for Gonzaga because of their affiliation with the West Coast Conference and Arkansas since their head coach is a graduate of the University of San Diego.

The only thing harder than picking a perfect bracket is selecting a basket of individual stocks that outperform the market every year.  Yes, it’s possible to beat the market in the short-term. I’m sure several individuals bought Peleton, Zoom, DocuSign, or NIO last year and made a lot of money riding the COVID wave. However, have they been profitable for five, ten, or thirty years? Also, the more stocks you own, the closer your portfolio will resemble an index fund. What is the magic number of stocks to hold? In one study, it’s twenty.[2] How are the four companies faring this year? They’re down 12.5%, underperforming the S&P 500.

Standard & Poors SPIVA study revealed that 82% of large-cap fund managers did not outperform the S&P 500 over ten years, and 87% failed to do so after fifteen years. The same data holds for small and mid-cap money managers. The study found that 74% of mid-cap managers did not beat the S&P 400, while 75% of small-cap managers failed to match the S&P 600.[3] I know what you’re thinking; I’ll only invest in the winners. Some professional money managers outperform the market over time, but can you identify them before they start their run?

Peter Lynch, the legendary fund manager of the Fidelity Magellan mutual fund, was thirty-three when he took over managing the fund. The fund only had $18 million in assets in 1977. The fund’s assets would swell to $14 billion when he retired. Before taking over as the lead money manager, the fund lost 42% in 1973 and 28% in 1974. If you invested $10,000 in the fund, you lost 70% of your capital. Would you have remained invested in the fund as Mr. Lynch took the helm? If you sold out to find a better money manager, you missed incredible returns. Mr. Lynch posted eye-popping returns from 1977 to 1990 as the fund generated an average annual return of 29.2%, more than double the S&P 500. In hindsight, Mr. Lynch was an obvious choice. His fund returned 2,570%. A $10,000 investment grew to $267,420![4]

I bet the person who currently has a perfect bracket is posting about it on social media letting the world know they picked Oral Roberts and North Texas. The same is probably true for people who chose a few winning stocks last year. I will let them enjoy their fifteen minutes of fame. If they can do it every year, then I will give them the credit they deserve.

In the meantime, I would recommend investing your money in a globally diversified portfolio of low-cost mutual funds. If you want to take a flier on a stock or two, then allocate 1% to 3% of your investment capital to your ideas.

Invest for the long-term, buy the dips, save your money, follow your plan, and good things will happen.

It’s the little details that are vital. Little things make big things happen. ~ John Wooden

March 20, 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] Google

[2] https://www.investopedia.com/investing/dangers-over-diversifying-your-portfolio/, by Brian Beers, 1/13/2020

[3] http://www.ginsglobal.com/articles/80-of-us-fund-managers-underperform-sp-500-over-5-years/#:~:text=Over%20the%20past%2010%20years,ending%20June%2030%2C%202020), Webiste accessed 1/20/2021

[4] https://en.wikipedia.org/wiki/Fidelity_Magellan_Fund

Runners and Sprinters

Running a marathon is a difficult task requiring months of training and discipline. Successful marathoners follow a strict training schedule and plan – a mixture of running, stretching, lifting weights, and eating a balanced diet. And I should know, having run several marathons, including the Boston Marathon in 2011.

Each marathon is a blend of runners – young, old, black, white, male, female, etc. It’s possible for 40,000 to 50,000 runners to run in marathons like Los Angeles, Chicago, New York, and Boston. At the starting line, everyone is nervous and excited. During a race, you will pass, and be passed, by other runners. However, there’s always a  group of young men (it’s always young men) who try to elbow their way to the front, dodging other runners like a punt returner. They would sprint ahead, but after a few miles, they’d be walking with their hands on their hips or standing on the side of the road gasping for air. This process repeated itself a few times before they faded away.  

During my first few marathons, I would fixate on these young sprinters and worry that I wasn’t running fast enough, but over time, I ignored them and focused on my goals, and it made for a better running experience.

As an investor, you may feel frustrated as others pass you by with high-flying investments like Tesla or Bitcoin, but don’t abandon your plan to chase returns. Follow your plan, save your money, think long-term, run your race, and good things will happen.

January 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.

My Generation

I love The Who and “My Generation is one of my favorite songs. Rolling Stone magazine considers it one of the greatest songs ever – number 11 out of 500.[1] The song was released fifty-five years ago, and it has been going strong ever since—a classic. Despite being an oldie, it’s still relevant today.

My investment career has spanned more than three decades. A benefit of longevity is that I get to work with generations of investors. During this recent downturn, I had several clients contact me about establishing investment accounts for their children. These kids are in their teens and early twenties. In one case, we created accounts for the fourth generation of family members by opening 529 college education accounts. I love it when young people begin investing.

One benefit of starting your investment strategy when you’re young is time. The longer you allow your investments to grow, the better. A majority of Warren Buffett’s wealth came after the age of 65. He started investing at age 11. According to Dave Ramsey’s Financial Peace University, if Jack invests $2,400 every year from age 21 to 30 and stops, he will accumulate $2.5 million by age 67. If Blake waits until age 30, and he invests $2,400 every year for 38 years, his account will grow to $1.48 million. Despite investing more money for longer, Blake fell about $1 million short of Jack.[2]

Here are a few ideas if you want to help your children or grandchildren build an investment portfolio.

Start small. Small companies historically outpace large companies. And, small companies eventually grow into large ones. According to Dimensional Fund Advisors, small companies produced an average annual return of 13.8% for the past 40 years, while large companies averaged 11.8%.[3] Apple is the largest company in the world measured by its market capitalization, but it once was a small company.

Buy individual stocks. A popular theme on Wall Street is to buy what you know. If you own an iPhone, buy Apple. If you wear Nike shoes, buy Nike. You can buy shares in any company you want. The advantage of this strategy is you can control what you own. The disadvantage is the lack of diversification and potential cost. For example, Amazon sells for more than $3,250 per share!

Buy mutual funds. A mutual fund will allow you to invest a small dollar amount into a fund of your choice – $25, $50, etc. The mutual fund manager will invest your dollars alongside other shareholders to buy several different companies. A mutual fund is also a great way to establish a monthly investment program. A disadvantage of a mutual fund is you won’t have any control over what you own. A mutual fund, for most, is the best choice for new investors, regardless of age.

Open a Roth. If you’re working, you can open a Roth IRA. A Roth allows your money to grow tax-free for decades. You can contribute $6,000 per year or 100% of your salary, whichever is less. If you buy and sell stocks inside a Roth, you do not have to pay capital gains taxes. When my daughter started working a few summers ago, we contributed 100% of her salary to her Roth.

Open a brokerage account. A taxable brokerage account will allow you to access your money at any time, for any reason – college, a new car, a trip, a house, and so on. The IRS will treat your trading activity as a capital gain or loss.

Slice and dice. Investment firms like T.D. Ameritrade, Schwab, and Robinhood allow you to buy and sell stocks and Exchange-Traded Funds (ETFs) without commissions. These companies may offer partial share trading, or slices, as well. For example, I mentioned Amazon trades for $3,250. If a firm allows for partial share trading, you can invest $100 in Amazon.

Keep your fees low. In addition to commission-free trading, keep your mutual fund fees low. All funds have operating expense ratios (OER), so read the small print. The lower the OER, the more money you get to keep. Index funds typically have low fees relative to other types of mutual funds.

Embrace volatility. Stocks fluctuate – daily. If your stock or fund drops, use it as an opportunity to buy more shares. Apple stock is up 1,300% over the past decade; however, it fell 40% in 2012, 25% in 2016, 32% in 2018, and 26% in 2020.[4] Don’t fear down days. Long-term wealth is created during the depths of a bear market.

Concentrate. Concentrate your investment holdings to a few companies or funds. Find a few great investment ideas and invest heavily in them.

Diversify. As your account grows, take some profits to buy more companies. For example, if you invest in a company and it doubles, sell half and purchase another stock.

Set goals. Why are you investing? How do you plan to use the money? Writing down your investment goals will make you a better investor. It can also help you to stay invested during market downturns.

Read. Your secret weapon to finding great investment ideas is reading. Here are a few of my favorite investment books.

  • One Up on Wall Street – Peter Lynch
  • The Only Investment Guide You’ll Ever Need – Andrew Tobias
  • The Wealthy Barber – David Chilton
  • How to Make Money in Stocks – William J. O’Neil
  • The Millionaire Next Door – Thomas Stanley
  • Everyday Millionaires – Chris Hogan

Review. Analyzing your investments will make you a better investor. Winners are great, but we can learn much by analyzing our losers.

Investing is a long-term journey, so be patient. My recommendation is to grow rich slowly. If you think generationally, it will allow you to ignore the daily fluctuations in the market and let your money grow over time. If you pursue risky, short-term gains, you may become frustrated and potentially give up on investing. Don’t be greedy.

Good habits formed at youth make all the difference. ~ Aristotle

August 21, 2020

 

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is T.D. 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.rollingstone.com/music/music-lists/500-greatest-songs-of-all-time-151127/the-clash-london-calling-3-66001/, April 7, 2011

[2] Financial Peace University workbook, Jack & Blake, pages 62 & 63

[3] DFA 2020 Matrix Book

[4] YCharts

What Is a Stock Split?

Tesla and Apple are splitting their shares, sending their stock prices higher. Wall Street, Twitter, and CNBC spent the last week or so commenting on the benefits of a split. What does it mean when a company decides to split its stock? Nothing.

What is a stock split? Let’s say you own 100 shares of a $100 stock valued at $10,000. If the company issues a two for one stock split (2:1), you will own 200 shares at $50 with a value of $10,000 once the split is complete. In this case, your shares doubled, and the price cut in half.

Tesla is issuing a five for one split, so for every share you own, you’ll own five afterwords. Tesla closed at $1,650 per share on Friday. If the split occurred today, the price would be $330. Since the announcement on August 11, the shares have soared more than 19% – in four days!

TSLA_chart (1)

Apple announced a four for one  (4:1) split, so for every share you own, you will hold four when completed. It is up more than 8% since the announcement. Apple last split its stock seven for one in 2014. If you purchased 100 shares on June 1, 2014, you would own 2,800 shares once they complete the recently announced split. Apple has split its shares five times.

AAPL_chart

Stocks splits used to be the norm. When a company reached a specific price, it would split its shares. For most companies, the magic price was $100. McDonald’s has split their shares eight times since the 1970s, while Coca-Cola has issued six, and Pepsi has done it five times.

What if a company doesn’t split its shares? Berkshire Hathaway trades for $316,251 because they have never issued a split. If Berkshire split its stock as often as Apple, the share price would be $1,411 – less than the price of Tesla and Amazon. If Apple never split its stock, it would trade for approximately $103,000 per share.

BRK.A_chart

When I lived in Connecticut, I chopped wood in the summer for our winter fires. After I cut a large piece of wood in two, I still had the same amount but in two smaller chunks.  I worked at a deli while in college. If someone ordered a sandwich, I cut it in two – same sandwich, two halves. When my family orders a dessert, we cut it into thirds – the same amount, three pieces.

Stock splits are exciting, but they do not add or subtract from the value of the company. One of the best ways to benefit from a stock split is to buy a great company and hold it forever.

You better cut the pizza in four pieces because I’m not hungry enough to eat six. ~ Yogi Berra

August 15, 2020

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

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