The Crow and the Pitcher

The Crow and the Pitcher is a famous Aesop fable. The crow is thirsty and stumbles across a pitcher of water, but he can’t reach the water because the neck of the pitcher is too narrow. The crow picks up small rocks and pebbles to drop them into the pitcher and raise the water level. His plan works, and he’s able to get his drink.

As investors, we can learn much from the action of the crow. If we invest a little money systematically, it will eventually grow.

Investing $100 per month into Vanguard’s S&P 500 index fund grew substantially over time. Here’s how much the account balance was worth after each decade.[1]

  • 10 years = $23,812.
  • 20 years = $64,815.
  • 30 years = $180,228.
  • 40 years = $673,745.

Ignore the market turbulence, invest always, focus on your long-term goals, and good things will happen.

A bird is three things: feathers, flight and song, and feathers are the least of these. ~ Marjorie Allen Seiffert

August 27, 2019

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

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

 

Illustration credit = Campwillowlake

 

[1] Morningstar Office Hypothetical. VFINX, month end July 31, 2019.

Berkshire Hathaway 2017 Annual Report.

The 2017 annual report for Berkshire Hathaway is available and, as usual, it’s chock-full of wisdom.  The information written in the first few pages is priceless.  Investors of all backgrounds and ages can benefit from the words of Warren Buffett. As the world’s greatest investor, there are 85.3 billion reasons to believe Mr. Buffett knows what he’s talking about; his guidance is timeless.

Here are a few nuggets I mined from the pages of this year’s annual report.

He and his partner, Mr. Charlie Munger, don’t use leverage to enhance returns. They shun debt because they don’t want to put their current assets at risk.  If you need proof of how leverage can destroy a company look no further than Toys R. Us.  After 70 years in business this storied franchise is shutting its doors forever due to a mountain of debt.  Using margin to try and increase your returns is just as foolish.  Leverage looks good when the market is rising but it will become a nightmare during a declining one.

Mr. Buffett doesn’t “depend on the kindness of strangers” to help him grow his business.   Meaning he doesn’t rely on bankers or money lenders to fuel his growth.  Berkshire invests in Treasury Bills for safety, liquidity and opportunities.  Their T-Bills helped them during the financial crisis of 2008-2009 and it gives them a cushion to “withstand economic discontinuities, including such extremes as extended market closures.”  T-Bills aren’t sexy, and bonds are boring.  Owning boring bonds while stocks are falling is comforting.  If you’re concerned about the recent stock market volatility, add T-Bills and bonds to your portfolio.

Investors want to know what tomorrow will bring, they want a crystal ball, so they can position their portfolio accordingly.   No one knows what will happen in the future, including Mr. Buffett.  When discussing the probability of a mega-catastrophe in the U.S.  he says, “No one, of course, knows the correct probability.”  When talking about market declines he adds: “No one can tell you when these (declines) will happen. The light can at any time go from green to red without pausing at yellow.”

He views stocks as a “businesses, not as ticker symbols.”   He doesn’t buy stocks “based on their ‘chart’ patterns, the ‘target’ prices of analysts or the opinions of media pundits.”   He adds: “In America, equity investors have the wind at their back.”  He also expects to own companies “indefinitely.”

Berkshire likes to acquire entire companies with a market cap in the “$5-$20 billion range” that are easy and simple to understand with “consistent earning power.”  If a company meets the criteria set forth by Mr. Buffett and Mr. Munger they can give “a very fast answer – customarily within five minutes – as to whether we’re interested.”

During the last 53 years the share price of Berkshire Hathaway has appreciated significantly but they “have suffered four truly major dips.”  The drops in the price of the stock are listed below.  If you panicked and sold your shares during one of these drops, you would’ve missed extraordinary long-term returns from Berkshire.

March 1973 – January 1975 the price of Berkshire stock fell 59.1%.

October 2, 1987 – October 27, 1987 the stock fell 37.1%.

June 19, 1998 – March 10, 2000 it fell 48.9%.

September 19, 2008 – March 5, 2009 it fell 50.7%.

The best part of this year’s annual report is when Mr. Buffett recaps his bet with Protégé Partners.  In December of 2007, he bet Protégé that an unmanaged S&P 500 index fund would outperform five funds-of-funds.  These five funds “owned interests in more than 200 hedge funds.”  The funds-of-funds could trade their hedge funds and add “new ‘stars’ while exiting their positions in ones whose managers had lost their touch.”  The active fund managers could trade as often as they wished while the index fund was left alone, a pure buy and hold strategy.  He recommends to “stick with big, ‘easy’ decisions and eschew activity.”

The hedge fund managers in the bet were receiving “fixed fees averaging a staggering 2.5% of assets.”  As he says, “Performance comes, performance goes.  Fees never falter.”

How did this bet turnout?  Mr. Buffett’s index bet trounced Protégé Partners, their funds-of-funds and the 200 hedge funds.  In fact, one of the funds was liquidated before the ten-year bet was over.  The average annual return for the Protégé team was 2.9% while the S&P 500 index returned 8.5%!  He said the returns these “helpers” generated was “really dismal.”  All the king’s horses, and all the king’s men…

He does mention that the risks of owning stocks is higher than owning short term bonds but over time they “become progressively less risky than bonds.”  He adds, “As has been the case since 1776 – whatever its problems of the minute, the American economy was going to move forward.”

As the market swoons, Mr. Buffett likes a “depressed market” because it gives him the opportunity to buy companies at reduced prices.   When the market falls, he and his team go shopping: “So when the market plummets – as it will from time to time – neither panic nor mourn.”

The infinite wisdom of Mr. Buffett carries on and we’d be wise to follow his counsel.  Here is a recap of his guidance:

  • Avoid leverage and debt.
  • Buy bonds and T-Bills for safety, liquidity, emergencies and opportunities.
  • It’s impossible to know the future so invest your assets based on your financial goals.
  • Buy businesses and not ticker symbols. Valuation and earnings matter.
  • Focus on simple investments that are easy to understand.
  • When, not if, stocks fall use it as an opportunity to add quality companies to your investment portfolio. Buying the dips has worked well for the past few hundred years and it will probably continue to do so going forward.
  • Buy low-cost index funds and hold them forever. A buy and hold strategy is a great way to create generational wealth.
  • Fees matter, so make sure they’re low. A fee audit can help you identify the fees you’re paying.
  • Indefinitely is a long time so don’t worry about the short-term moves in the stock market. Your financial goals are more important than short-term volatility.

Last, Mr. Buffett references Rudyard Kipling’s, If, in this year’s annual report so here’s a link to the poem:

http://www.kiplingsociety.co.uk/poems_if.htm

IF you can keep your head when all about you are losing theirs… ~ Rudyard Kipling

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

4/8/18

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

 

 

 

 

 

Fishing from my Driveway.

A boat resting on a driveway is safe from the wrath of Neptune and Poseidon.  It can sit peacefully on concrete protected from waves, tides and rocks.  However, a boat isn’t made to sit idle on a driveway; it’s made for the high seas.  Similarly, fishing from a driveway doesn’t work either.   The boat and the fisherman need to be on the water.

A boat on the water is exposed to more risk, as is the fisherman.   The risks increase the further the boat travels from shore.   The waves get bigger, the wind howls harder but the payoff is greater.  The reward of catching an enormous fish is worth the effort.

Investing carries many levels of risk and safety.  It’s possible to never leave shore and invest for safety and guarantees.  If you’re concerned about losing money, you can invest your money in a certificate of deposit or U.S. Treasury Bill.  These two investments will guarantee a rate of return if held to maturity.  They’ll also guarantee a low rate of return as both yield about 1%.   These two items may work in the short term but won’t hold water as long-term investments.

To create wealth an investor needs to have exposure to risk assets like stocks.  Stocks fluctuate like a boat on the water but if held for the long term they will treat you well.  In the short term, stocks rise and fall with much fanfare.  When stocks fall, the media will want to know if this is the beginning of the end.  It may feel like the end of times if you’ve lived through the corrections of 1987, 2000 or 2008.  Despite the previous storms, the stock market recovered and sailed to all-time highs.  Historically stocks have averaged a 10% annual return despite the drops.

Set a course for adventure and invest to achieve your goals.  Diversify your assets across stocks, bonds and cash so you can keep your portfolio afloat!

A ship in harbor is safe — but that is not what ships are built for.” ~ John A. Shedd.

And when he got into the boat, his disciples followed him. ~ Matthew 8:23.

Bill Parrott is the President and CEO of Parrott Wealth Management.  For information on financial planning and investment management, please visit www.parrottwealth.com

June 10, 2017

 

 

 

Nothing but Net.

One of the best sounds in sports is the swish of basketball as it passes through the net.   The ball flies over the rim and touches nothing but net.  I love watching long range shooters drain effortless, smooth three pointers.   Some of the greatest shooters in the game have been Larry Bird, Kobe Bryant and Steph Curry.  My favorite long range shooter was Meodowlark Lemon of the Harlem Globetrotters.  He would meander to the half court line, say a few jokes, launch a sky hook and it would swish though the net.

My friends and I used to play H-O-R-S-E at the local park.  Our shots were creative and crazy.  The stakes went up when one of us would call a shot with a swish.   The basket would only count if it was a swish. If the shot hit the backboard or the rim, it didn’t count.   The swish shot put added pressure on the players.

Investing has its own version of nothing but net.   It’d be nice to bank gross returns but this isn’t possible.   Gross returns are impressive but you can only spend net returns.  To calculate your net return, you must subtract inflation, taxes and fees.  The net return is what you can spend to buy food, gas and other household items.

Let’s review some net returns.

Stocks.  The gross return on stocks from 1926 has been 10%.  A 10% return is impressive especially when it’s compounded over 90 years.   Inflation during this time frame averaged 2.9%.   Subtracting inflation, the gross return for stocks falls to 7.1%.   Minus a 28% tax rate lowers your return to 5.1%.  If you work with an advisor who charges 1%, your net return is now 4.1%.   Netting out inflation, taxes and fees your 10% gross return cascades 59% to 4.1%.  A $10,000 investment in stocks will grow to $372,000 over 90 years with a net return of 4.1%.

Bonds.  Long term government bonds averaged 5.6% for 90 years.   Inflation reduced this return by 2.9%.  Subtracting taxes and fees your net return is now .94%.   A $10,000 in bonds is now worth $23,200.

Cash.  The cash return will leave a hole in your wallet.  The one-month U.S. Treasury Bill averaged 3.4% since 1926.   Subtracting inflation, taxes and fees your net return drops to a negative .64%.  A $10,000 “investment” in cash is now worth $5,611.

You need to own stocks to create generational wealth.   A heavy dose of bonds and cash in your portfolio is an air ball.   It’s recommended to keep a large portion of your portfolio in stocks so you can stay ahead of inflation, taxes and fees.

I hate to lose more than I like to win.  ~ Larry Bird

Bill Parrott is President and CEO of Parrott Wealth Management.  For more information on investment management and financial planning, please visit www.parrottwealth.com.

May 7, 2017

Note:  Your returns may be more or less than those posted in this blog.

Time to Play It Safe?

In 1926 Mrs. Moats invested three dollars in separate investments.  She placed a dollar coin in three distinct boxes with strict instructions to not open them until December 31, 2015.  She invested one dollar in large company stocks for her “risky” box.   Her next dollar was invested in a “safe” portfolio of U.S. Treasury Bills.  In the third box, she kept her dollar in cash just in case box 1 and box 2 ended up worthless.

After the coins were placed in the respective boxes, she buried them in her backyard.

On December 31, 2015, her grandchildren dug up the boxes to see how well her investments performed.   With all the trouble and turmoil during the past 89 years her grandchildren were convinced the safe investments had performed best.   Here is how each dollar fared.

Box 1 – Large Company Stocks.  Her $1 investment is now worth $5,386.  Her large company portfolio returned 10% per year.  Her “risky” portfolio endured years of negative returns and extreme volatility to dramatically outperform her “safe” investments.[1]

Box 2 – U.S. Treasury Bills.  Her $1 investment is now worth $21.[2]   Her “safe” portfolio averaged an annual return of 3.4%.  Her “safe” portfolio made money every year and never had a negative return.

Box 3 – Cash.  The value of her 1926 dollar is now worth about 8 cents.   The purchasing power of her original dollar has been eroded by inflation.   Inflation averaged 2.9% per year during this 89 year stretch.[3]

The U.S. stock market is near an all-time high.  By some measures the stock market is fairly valued if not overvalued.   The public outcry for a stock market correction is increasing as the market climbs higher.  Is it time to play it safe?   Should you sell your stocks and move the money to cash?  In the short term, this strategy may appear prudent.  It would be nice to avoid another stock market correction.

Here are a few things to consider before you sell your growth oriented investments.

  1. When should you sell your stocks? Today?  Tomorrow?  Next week?  How will you know when it’s the right time to sell?   If you sold your stocks before last year’s presidential election, you missed a 16% return.
  2. If you sell your stocks, when should you buy them back? How will you know when it’s safe to get back into the market?  If you were fortunate enough to sell your stocks prior to the 2008 Great Recession, but failed to get back into the market you missed out on a 192% gain.
  3. If you decide to keep your money in cash, you’ll lose money after applying taxes and inflation. At the end of five years, the purchasing power of your dollar will lose about 15%.  In 1988, I could purchase four U.S. postage stamps with my dollar, today I can only buy two. [4]

Long term a safe investment is not so safe.  A buy and hold strategy based on your financial plan is one to employ.  Owning stocks for the long haul will give you the best opportunity to achieve generational wealth.

For whoever has will be given more, and they will have an abundance… ~ Matthew 25:29.

Bill Parrott is the President and CEO of Parrott Wealth Management.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

April 17, 2017

[1] Dimensional Fund Advisors 2016 Matrix Book.

[2] Ibid.

[3] Ibid.

[4] https://about.usps.com/who-we-are/postal-history/domestic-letter-rates-since-1863.pdf, Historian U.S. Postal Service, website accessed 4/21/2017.

Say What?

I spent most of my youth playing football.  I played football in junior high, high school and college.  Our playbooks included diagrams and words not legible to the lay person. Some of the plays were “I right 30 trap”, “trips right 382”, or “Alabama 99.”  Each play had a different meaning.  After the play was called we all knew our specific assignment.    The language became second nature to everyone on the team because we practiced them constantly.

My friends and I would play pickup games at the park when we weren’t playing organized football.   The play calling for these games was simple and clear.   I might tell Steve to run towards the hippo water fountain and Randy to run at the rocket.   Dave might run to the dead grass spot and then towards the swing set.

Watching CNBC this past week I was amused and horrified with the language used to describe various investments and investment strategies.   Here is a sample.

  1. “We are tactically allocating our risk assets to deliver alpha to our high net worth clients by purchasing high beta cyclical names.” What?   Here is my interpretation of what was said, “We are buying profitable stocks so we can make money for our clients.”
  2. “We are removing risk assets from our satellite portfolio by purchasing low volatility, negatively correlated assets.” Huh?  I would have said we’re buying bonds.
  3. “We’re going to deleverage our non-liquid, alternative assets and transition the proceeds to our short-term liquid account.” Come again?  I think they meant to say they’re selling assets and then depositing the money into their cash account.

Wall Street lingo is designed to confuse the masses.  The wolves use big words and fancy wrappers to sell high commission products to the sheep.  At the end of the day folks there are only three things you can do with your money.  You can invest for growth, income or safety.    If you’re investing for growth, buy stocks.   If you need income, buy bonds.  If you crave safety, keep your money in cash.

As you construct your portfolio ask yourself what investments are needed to achieve your goals.  Focus on simple investment strategies with clear language and hold them for the long haul.  Capisce?

If as one people speaking the same language they have begun to do this, then nothing they plan to do will be impossible for them.  Come, let us go down and confuse their language so they will not understand each other. Genesis 11:6-7

Bill Parrott is the President and CEO of Parrott Wealth Management and is a fan of the simple.  If you want more information on financial planning or investment management please visit www.parrottwealth.com.

April 13, 2017

 

Spring Cleaning.

Snow is melting.  Flowers are blooming.  Grass is growing.   Robins are singing.  Spring has arrived.   With the arrival of spring it’s now time for a little spring cleaning.   After months of dark days and cold nights, open some windows and let the fresh air into your home.

When my family and I lived in Connecticut we loved the arrival of spring.  Once the snow melted we’d put our yard back together.   We’d walk around our yard picking up branches and tree limbs.  We’d clear flower beds and add layers of mulch.   On the inside, we’d open several windows and let the fresh spring air whip through our house and force the stale winter air out of our home.

Your investment portfolio may need some spring cleaning as well.   The arrival of spring also marks the end of the first quarter and hopefully you’re closer to achieving your financial goals.

Here a few spring cleaning tips for your investment portfolio review.

  • If you’re holding a losing investment, it may be time to sell it and move the money into a new idea.  Prune your portfolio as you prune your garden.
  • Do you need to trim some gains? If you have an investment worth more than 10%, 20% or 30% or more of your account, it’s time to take some gains.   It’s been said trees don’t grow to the sky.
  • Is it time to rebalance your portfolio? Rebalancing your account will help reduce your risk and keep your original asset allocation intact.   For example, in 2009 you started with a portfolio of 50% stocks and 50% bonds, today your mix is 70% stock and 30% bonds.   The stock market has soared since 2009 and, as a result, your stock and bond allocation is not aligned with your original goal.    A rebalance will fix this issue.
  • The spring is a great time to finish an outdoor project. Adding a deck, pool or barbeque to your home you may enhance the value.  Adding small, international or real estate companies to your account may give it a boost.
  • Do you need to update your will? Has your family grown?  Have you added new asset classes?  With the arrival of spring and the departure of tax season spend some time updating your will.
  • Create a financial plan. A well-constructed financial plan will help you with your annual spring cleaning.  Your financial plan will allow you to focus on your long-term goals with an occasional trim here and there.

Sitting on a deck under sunny skies is an excellent backdrop for the review of your portfolio.   A small change today can bear much fruit tomorrow.

For behold, the winter is past; the rain is over and gone. The flowers appear on the earth, the time of singing has come, and the voice of the turtledove is heard in our land. ~ Song of Solomon 2:11-12.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.   For more information on financial planning and investment management please visit www.parrottwealth.com.

April 10, 2017

 

What’s the YTB?

“What’s the YTB?” an elder broker bellowed from the back of the conference room.

“5%!” responded the wholesaler.

“Sweet!” answered the broker, “I will sell your fund!”

I was attending one of my first branch meetings as a newly minted broker and had never heard the term YTB.  I had heard of other yield acronyms like YTM for yield-to-maturity and YTC for yield-to-call but not YTB.

The YTB is referred to as the yield- to-broker.  The YTB is what the broker was going to earn for selling the mutual fund.   The broker didn’t care about the features or benefits of the fund; his only concern was what he was going to get paid for selling the product to his clients.

Brokerage and insurance products are sold and not bought.   Brokerage firms and insurance companies are product manufacturing machines.  Their product creativity and distribution system is without peer.  Full service investment firms and discount brokerages have a vested interest to sell you their products.  These firms may earn a commission when you buy their fund and they’ll receive an on-going fee while you own your investment.

When you purchase a product from a brokerage firm or insurance company it’s buyer beware or caveat emptor.  The product may have a front-end commission where the fee is deducted from your investment or it may have a back-end sales charge that triggers when you sell your fund.   It’s important to read the small print before you commit your capital to a new investment.

When I started my own advisory firm, I had a visit from a life insurance agent who wanted to show me one of his permanent life insurance products.  The example was a $1 million policy with an annual premium of $100,000 for ten years.  I asked him what his commission was going to be if a client invested in this policy.  He told he his first-year commission would be $55,000!  I stopped listening to his sales pitch after he told me what his fee was going to be.   We haven’t done any business together.

As you invest your hard-earned dollars take some time to ask questions about the fees you’ll be paying.  Here are few questions to get you started.

  1. How do you get paid?
  2. What is the fee or commission on this product?
  3. Is there a penalty for selling early? How early?
  4. Are there any other fees?
  5. How does this fee compare to other fees?
  6. Do you own this same investment?
  7. Does your mother own this same investment?
  8. Are there investments with lower fees?
  9. Is the fee tax deductible?
  10. Does the fee go down if I invest more money?

Keep an eye on your costs.   You can control the fees you pay when you invest.  The lower your fees, the higher your returns.

Honest scales and balances belong to the Lord; all the weights in the bag are of his making. ~ Proverbs 16:11

Bill Parrott is the President and CEO of Parrott Wealth Management and is in favor of lower fees and transparency.     For more information on investment management and financial planning, please visit www.parrottwealth.com.

March 27, 2017

 

 

 

 

 

By the People and For the People?

President Trump and House Speaker Paul Ryan pulled the plug on their Republican health care bill.  The same week, Chuck Schumer encouraged his fellow Democrats to filibuster Neil Gorsuch, the nominee for the U.S. Supreme Court.  Politics as usual.

Democrats and Republicans have been adversaries from March 4, 1797 when John Adams was elected as the second President of the United States.   The parties have been butting heads for 220 years and despite their best (worst) efforts our economy and stock market continue to march on.  I’m afraid their bickering and whining will carry on for another 220 years.

While watching CNBC, commentators, money managers, traders, and other experts were predicting the stock market to fall on the news the health care bill had flat lined.  The experts painted a bleak picture for Trump’s presidency because the health care bill was dead on arrival.   They opined the news doesn’t bode well for the other items on his agenda.

As far as your investments are concerned, does it matter what our elected officials pass or don’t pass?  Does it matter if they fail to reach a compromise on important issues?  Does it matter who is in the White House?  Congress?  The Senate?  The short answer is no.  In the long run, it matters little to what happens in Washington D.C.

It took our elected officials 76 years to abolish slavery, 131 years to allow women to vote, 175 years to pass the Civil Rights Bill, and 201 years to pass the American’s with Disabilities Act.  Can you imagine how much stronger our country would be if our politicians had been working for the people since 1789?

Robert Shiller has been tracking stock prices from 1871.  In 1871 the index was at 4.44 and Friday the S&P 500 closed at 2,438.98 a gain of 54,831%![1]  The invisible hand of the free market continues to rule the day.

Our elected officials are supposed to be for the people, however, if you want to stay in the know follow the titans of business.   Tim Cook, Warren Buffett, John Bogle, Fred Smith, Sheryl Sandberg, and Robert Johnson will tell you all you need to know about our economy and the state of America.   Business leaders put money in your pockets while politicians take it out.  Elected officials come and go.  When the market does fall because of what happens in D.C., use it as an opportunity to buy the dip.

Try to ignore the rhetoric and mudslinging when constructing your investment portfolio. Here are few tips you can use to put yourself in a position to win.

  1. Create your financial plan. Your financial plan will be your guide for you and your family.  Your plan will be a collection of your hopes, dreams and fears.  Your plan will guide your investments.
  2. Invest in stocks. The stock market will be your best friend over time. Investing in low cost index funds or high quality stocks should be the cornerstone of your portfolio.
  3. Automate your investing. When your investments are automated you’re less likely to stop investing due to political noise.
  4. Rebalance your investment portfolio on an annual basis. This will help reduce your risk and keep your portfolio in balance with your long-term goals.
  5. Invest early and often. The earlier you start investing the more money you’ll have in your account.
  6. Spend less than you earn. The more money you can save the better your financial position.
  7. Avoid excess debt. Your total monthly debt payments should be less than 38% of your gross income.  If your gross income is $10,000 per month, your debt payments should not exceed $3,800.
  8. Give money away. Do some good with the money you’ve accumulated with your smart and sensible investing.

You can find good reasons to scuttle your equities in every morning paper and on every broadcast of the nightly news. ~ Peter Lynch.

Bill Parrott is the President and CEO of Parrott Wealth Management and is a believer in the invisible hand.  For more information on investment management and financial planning, please visit www.parrottwealth.com.

March 26, 2017

 

 

 

[1] http://www.econ.yale.edu/~shiller/data.htm, Robert Shiller, Long term stock, bond, interest rate, and consumption data accessed 3/26/2017.

Shaw’s Cove.

Shaw’s Cove is a beautiful slice of paradise located in Laguna Beach.   While growing up my friends and I spent most of our day at Shaw’s Cove.  We went to Shaw’s because Main Beach would get too crowded in the Summer time.

We’d walk to Shaw’s equipped with three items: Boogie Board, snorkeling gear, and smashball.   Throughout the day, we’d use all three things.  If the waves were up, we’d ride our Boogie Boards.   If there were no waves, we’d go snorkeling.   When we got tired of being in the water, a rare event, we’d play smashball.   We’d repeat this process until we got hungry.  Our strategy prepared us well for all the beach conditions.   It was our version of being hedged.

An investor should be prepared for all market conditions.   A successful investor will own investments for growth, income and safety.   These three investments will treat you well over the long term.

Stocks are owned for growth.  The stock market is your long term, wealth generating machine.  The stock market will play a huge part in creating your family wealth.   The stock market does not rise every day or every year, of course.   During the fabled history of the stock market, there have been major disruptions to the long-term trend.   However, from 1926 to 2015 the S&P 500 has generated an average annual return of 10%.[1]

Bonds are owned for income.   Bonds are boring and stable and will also play a significant part in generating your family’s wealth.  Bonds pay predictable income allowing you to receive monthly, quarterly or annual income.    Bonds can also be owned for safety.   When the stock market is falling, bonds will usually rally.   From 1926 to 2015 long-term U.S. Government Bonds have averaged 5.6%.[2]

Cash is owned for safety.  Cash is king.  It’s always nice to have some dry powder.  Cash is safe and liquid.  If you need access to capital, look no further than cash.   When stocks or bonds fall, it’s nice to have cash on hand so you can buy them on the dip.   Cash can help you ride out a stock market correction.  With a strong cash position, you can afford to hold on to your stocks while they recover.   From 1926 to 2015, cash, as measured by the U.S. T-Bill, has averaged 3.4% per year.[3]

Stocks, bonds and cash are the cornerstone of a solid portfolio.   These three investments work in concert to help you balance your portfolio.   If you own more stocks than bonds or cash, you’re an aggressive investor.   If you own more bonds or cash than stocks, you’re a conservative investor.

A portfolio with 70% stocks, 25% bonds and 5% cash generated an average annual return of 8.57% from 1926 to 2015.   A $10,000 investment in 1926 is now worth $15 million.

A portfolio with 50% stocks, 35% bonds and 15% cash generated an average annual return of 7.47% from 1926 to 2015.  A $10,000 investment in 1926 is now worth $6 million.

A portfolio with 30% stocks, 50% bonds and 20% cash generated an average annual return of 6.48% from 1926 to 2015.  A $10,000 investment in 1926 is now worth $2.6 million.

As you can see from these examples, the more stock you own, the greater your long-term wealth.  It’s important to match your asset allocation to your financial plan and goals.  If your investments are in line with your goals, you’re likely to stick with your plan for the long haul.

I could not help concluding this man had the most supreme pleasure while he was driven so fast and so smoothly by the sea. ~ Captain James Cook

Bill Parrott is the founder and CEO of Parrott Wealth Management and a lover of the sea.   To obtain more information on investment management and financial planning, please visit www.parrottwealth.com.

March 23, 2017

Note: Your returns may be more less than those posted in this blog.

[1] Dimensional Fund Advisors Matrix Book 2016.

[2] Ibid.

[3] Ibid.