Fifteen Year-End Tips

The end of the year is quickly approaching, and what a year it’s been. The S&P 500 is up more than 25%, and unemployment is near historic lows. It’s been a great year to make some money and do some good.

As we approach the end of the year, here are fifteen tips you can incorporate today.

  1. Contribute the maximum to your 401(k) or 403(b). You’re allowed to contribute $19,000 and if you’re 50 or older, you can add another $6,000.
  2. Contribute the maximum to your IRA. You’re allowed to contribute $6,000 and add another $1,000 if you’re 50 or older.
  3. Spend the money in your flexible spending account (FSA). The FSA is a “use it or lose it” plan, so make sure you spend it.
  4. The stock market has done well, but you may own a loser or two. If you are sitting on losses, sell them to offset your gains. The IRS will allow you to offset your gains dollar for dollar. If you have realized gains of $15,000, then you can realize losses of $15,000 to offset your gain. If you don’t have any realized gains, you can write off $3,000 per year until your loss is absorbed.
  5. If you have significant gains in a stock, consider gifting it to your favorite charity. You can send your shares in-kind directly to your charity to avoid capital gains. You’ll be able to deduct the fair market value of your gift. The charity can sell the shares, free of taxation, and use the proceeds for good.
  6. Review your asset allocation. With the increase in the stock market, your equity exposure might be too high relative to your risk level. If your alignment is off-kilter, consider rebalancing your account.
  7. Sell some of your investments to pay off your debt. Debt is a four-letter word, and the less debt you owe, the better off you’ll be.
  8. Take a trip. If you’ve done well this year, then reward yourself and take your family on a journey. It’s okay to spend money on experiences and enjoy the fruits of your labor.
  9. Update your beneficiaries. Review your beneficiaries on your retirement accounts and insurance policies. It only takes a few minutes to make the changes.
  10. Start, finish, or update your will. Have you been putting off contemplating your mortality? If so, use the holiday season to complete your will.
  11. Review your spending. Download your checking, savings, or credit card statements to Excel to review your spending habits.
  12. Start your budget to get ready for 2020. Apps like everydollar.com or mint.com can help you improve your budgeting.
  13. The IRS allows you to give away $15,000 per person. It’s a tax-free transfer, and there are no limits to how many people can benefit from your generosity.
  14. Donate cash to your favorite charity.
  15. Be an anonymous angel. Can you pay off someone’s debt? Do your local schools have children with student lunch debt? Are there families that need money for groceries or transportation? If you’re not sure, contact your local church or school because they usually have a list of people in need.

“His master replied, ‘Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master’s happiness!’ ~ Matthew 25:21

November 29, 2019

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

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

 

 

Are You Earning 20 Percent?

The stock market is soaring this year with index returns topping 20 percent. The NASDAQ, S&P 500, and Dow Jones have risen 27.3%, 23%, and 18.4%, respectively. It’s a good year to own stocks despite Brexit, The Trade War, and the Boeing disasters.

Are you earning 20 percent? If so, congratulations. A 20% return is twice the long-term historical average of 10% for the stock market.

NASDAQ, Dow Jones, & S&P 500:

^IXIC_^DJI_^SPX_chart

If your assets are diversified, you’re probably earning less than 20 percent. Most likely, you also own small-cap and international companies along with a few bonds. Your exposure to large-cap stocks might be less than 25% of your total portfolio. The more stock exposure you have, the higher your returns are for this year.

Various Asset Classes:

IJR_VWO_TLT_SHY_EFA_chart

How have the other asset categories performed this year? Small-cap stocks = 17.3%, international stocks = 16%, emerging market stocks = 12.6%, long-term bonds = 11.6%, and short-term bonds = 1.2%.  A balanced portfolio of these asset classes has risen 17.3% this year.

Balanced Portfolio: 60% stocks, 40% bonds:

P176514_chart

Investing all your assets in the S&P 500 this year would have been a wise decision if you knew in advance the market would rise substantially. Remember, the market was down 16% last December, and few people dared to buy the dip. Last year the S&P 500 lost 6.24%, and during the Great Recession from 2007 to 2009, it fell 56%. During the Tech Wreck from 2000 to 2003, the index dropped 49%.

The Great Recession:

^SPX_chart (2)

The Tech Wreck:

^SPX_chart (3)

The 1970s was also a tough time for stocks. From 1973 to 1979, the S&P 500 lost 8.6%.

The Seventies:

^SPX_chart (4)

Should you invest all your assets in the stock market? If you have a high tolerance for risk and you can handle the volatility, then go for it — however, a more prudent recommendation is to invest in a low-cost globally diversified portfolio of mutual funds.

How do you know if you can handle the heat of a single index? Here are a few suggestions.

Investing requires patience and prudence. Do not chase returns or get lured into risky investment strategies, because if it looks too good to be true, it probably is. Instead, focus on your goals, invest often, keep your fees low, and think long term.

The simple believes everything, but the prudent gives thought to his steps. ~ Proverbs 14:15

November 11, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. 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.

 

 

 

 

 

 

 

Yard Sales and Investing

Twice a year, my neighborhood holds a yard sale. It’s well advertised, so people come from all over town to hunt for trinkets and treasures. The buyers arrive with a plan and a purpose.

The people who visit our neighborhood are seasoned yard sale shoppers. Arriving in trucks with trailers, they scour our streets looking for bargains. Most were looking for clothes or small household items. I had several drive buys, but nothing the shoppers wanted. I guess they didn’t need tennis rackets or baseball mitts.

One shopper had a trailer full of used equipment like bikes and lawnmowers. The items he found needed repair, and I’m sure he’ll fix them up to resale them at a higher price. His specialty appeared to be items that were broken or needed a little TLC. One man’s trash is another man’s treasure.

In addition to being value shoppers, the buyers haggled for lower prices. If it cost $10, they’d offer $5. If the seller didn’t budge, the buyer moved on to another house. They’re patient and shrewd buyers.

Now and then, a buyer finds a rare gem. One man found an original signed copy of Ernest’s Hemingway’s The Old Man and The Sea. He purchased the book for $2, and it’s probably worth more than $30,000. A buyer in Fresno, California bought a box of photo negatives for $45 and later found out they belonged to Ansel Adams. The images are worth more than $1.8 million. An Arizona buyer found a Jackson Pollack painting worth more than $5 million.[1] It pays to hunt for a bargain.

Investors can learn much from weekend yard sale shoppers like focusing on value, being patient, and having a plan. Patient investors can take advantage of market drops to find companies in the bargain bin. When stock prices drop, most investors tend to look the other way. Not so with value investors. If a company has issues, value hunters know they’re going to get a reasonable price. Sellers, on the other hand, are liquidating because of fear. For example, Kraft Heinz, Nordstrom, Walgreen’s, 3M, Pfizer, and Schwab are all down more than 10% this year, and investors don’t appear interested in these blue chips. It’s unlikely these companies will stay down forever, so at some point value investors will swoop in and start buying.

As we approach the end of the year, look for investments that are down and out that may rebound in a year or two. If you currently own poor-performing investments, be patient.

To improve your investment results, consider a financial plan. A well-constructed financial plan will help you identify and quantify your financial goals. A Certified Financial Planner® will use your financial plan to assist you with managing your debt, taxes, investments, retirement, education, philanthropic and estate planning needs.

“I am sending you out like sheep among wolves. Therefore, be as shrewd as snakes and as innocent as doves.” ~ Matthew 10:6.

October 9, 2019

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

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

 

 

 

 

[1] https://bestlifeonline.com/garage-sale-finds/, Alex Daniel, February 22, 2019

A Few Ways to Lose Money in The Stock Market

The market loves to rip wealth from the hands of investors who panic as stocks fall. The Dow Jones fell about 7% from its high last week because the yield curve inverted for a few minutes.

Markets have been rising and falling for centuries. Since 1926 they’ve risen about 75% of the time. A quarter of the time they’re falling – hard. When stocks fall, investors panic.

Stocks have risen 173% over the past ten years. A $10,000 investment in 2009 is now worth $27,260. However, during this great bull run, the Dow Jones has fallen several times. It fell more than 10% in 2010, 2011, 2015, 2016 and 2018. In December it fell 25% from its high-water mark. Despite the drops, the market has always recovered. Investors who sold their stocks last December missed a 19% rebound in 2019.[1]

The graph below shows all the drops in the market for the past ten years. Despite these drops, the market has risen substantially since 2009.

^DJI_chart

The chart below shows the gain in the Dow Jones Industrial Average from 1950, producing a gain of 17,790%. Since 1950 the U.S. economy has experienced 17 recessions.

^DJI_chart (1)

As stocks gyrate, here are a few ways to lose money in the stock market.

  • You don’t have a plan on how to invest your assets. You trust your financial future to luck, hope, and chance, playing a guessing game as to which investments will do well.
  • Your investment ideas come from cable television shows or social media sites. Remember, the commentators aren’t talking to you directly; they’re broadcasting their message to millions of viewers.
  • You don’t do any research or homework before you buy a stock. And, more importantly, you don’t have a sell strategy. To make money in stocks, you must have discipline when you buy and sell. Knowing your entry and exit points are paramount to make money when you invest.
  • Investors mistake volatility for risk. If you do, you’re more likely to sell stocks when they’re down. The Dow Jones has a standard deviation of 1%, meaning a 1% drop in the Dow is about 260 points. When investors hear that the market is down 260 points, they panic. However, this move is typical and expected.
  • Time matters when you invest in stocks. The market is efficient in the long-term, but not so much in the near term. If you need money in one year or less, don’t buy stocks.
  • Trying to time the market is impossible. From 1990 – 2018, the S&P 500 returned 9.29%. If you missed the 25 best days, your return dropped to 4.18%.[2]
  • A lack of diversification hurts investors in a downdraft. A well-diversified portfolio owns several investments that rise and fall at different times. If all your investments are moving in the same direction, you’re not diversified. For example, the Dow Jones has fallen 5% for the past month, but long-term bonds have risen 10%.

Over the next 100 years, the U.S. will experience several recessions, maybe even a depression. The market will rise substantially and fall dramatically. No one knows! It’s impossible to predict a recession since most of the economic data is trailing, so by the time it’s been identified, it’s probably half over.

I do understand that market drops are scary. However, holding and buying stocks through market troughs has proven to be a winning strategy. If you invested $10,000 in the Dow Jones on October 1, 2007, just before the start of the Great Recession, your balance would be worth $18,340 today. At the market low, your balance dropped to $6,547. If you sold, you locked in a loss of $3,453. If you held on, you made $8,340.

What I do know is that investors who follow their plan, save money, diversify their assets, invest for the long-term usually win in the end.

Stay the course, my friends.

Even though I walk through the darkest valley, I will fear no evil, for you are with me; your rod and your staff, they comfort me. ~ Psalm 23:4

August 23, 2019

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

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

 

 

[1] YCharts. Website Accessed August 23, 2019

[2] Dimensional Fund Advisors, Investment Principles

50 Days or 50 Years?

The summer season started 50 days ago, and 50 years ago, Neil Armstrong walked on the moon. One short-term, one long.

Traders are short-term focused, and they use a bevy of indicators to try to gain an edge. One of their tools is the moving average. What is a moving average? Here is a definition from Investopedia: “A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random short-term price fluctuations. It is a trend-following, or lagging, indicator because it is based on past prices.” Since it’s a trend following system, traders will try to ride it for as long as possible.

Traders can focus on several moving averages – 10, 20, 30, 50, 100, or 200 days. When an index trades above its moving average, it’s considered a bullish sign for it to climb higher. When the index dips below it, traders consider it a bearish sign that the market will fall further.

Traders and commentators love to focus on a moving average as a key indicator of short-term moves in the market because it’s an easy indicator to follow. When the index crosses above the moving average, buy. When it dips below, sell. It sounds so simple.

Here’s a look at the most recent 50-day moving average for the S&P 500.

^SPX_chart

Currently, the S&P 500 is trading below it’s 50-day moving average. Should you sell? If you bought the index 50 days ago when the index was trading above the moving average, you’d be down 1.2% if you held on through yesterday’s close. In the past 50 days, the index has crossed through its 50-day moving average six different times.

Traders also rely on the Golden Cross and Death Cross. The Golden Cross occurs when the 50-day crosses above the 200-day, a bullish sign. The Death Cross occurs when the 50-day crosses through the 200-day and falls below it, an extremely bearish signal.

Should you trade the moving averages? If you’re a disciplined short-term trader, it may give you an edge. However, stocks and indices move through their moving averages constantly so you may get whipsawed by the numerous buy and sell signals.  And which indicator should you follow? A 10-day indicator will give a different signal than the 200-day moving average.

A buy and hold investor can save time and stress by ignoring the moving averages. Rather than looking for trading indicators, focus your efforts on identifying your financial goals so you can take advantage of the long-term trend of the stock market.

Fifty years ago, the S&P 500 closed at 93.94. This past Friday the index closed at 2,918.65 – a gain of 3,006%! If you tried to trade each move through the moving average, your returns probably would’ve been a lot less.

^SPX_chart (2)

The long-term trend of the market is hard to beat, but it hasn’t been a straight line. It has been littered with violent moves. The index has fallen 30% or more seven times since 1969, or about 1 in every 7 years. From September 2000 to February 2013 the index traded flat. Investors who grew frustrated with 13 years of poor performance and sold their holdings missed a 93% return from 2013 to 2019.

Is it better to focus on a short-term trading strategy or concentrate on a long-term buy and hold model? I prefer the buy and hold model. Here are a few suggestions to help you answer your own question.

  • If you need the money in one year or less, keep your assets in short-term vehicles like CDs, Treasury Bills, or money market funds.
  • If your money is earmarked for something like paying for college or buying a new home, then keep your money in short-term investments regardless of the time frame. For example, if you plan to buy a new home in three years, then your money should be kept in short-term, conservative investments.
  • If you want to try your hand at short-term trading, limit your risk capital to 3% to 5% of your investable assets. If you’re successful, it will enhance your returns. If you’re not, it won’t bring financial ruin.
  • If your time horizon is 3 to 5 years or more, invest in stocks.
  • Work with a Certified Financial Planner® to help you identify and quantify your goals.

Timing the market is extremely difficult regardless of the indicator you choose. Rather than trying to time the market, spend time focusing on your financial goals.

We don’t really look at the stock, you know. Because for us, it’s about the long term. And so, we’re very much focused on long-term shareholder value but not the short-term kind of stuff. ~ Tim Cook


August 11, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. 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.

Stocks or Funds?

Is it better to buy individual stocks or mutual funds? It depends, of course, on several factors like how much to invest or how much risk you’re willing to take. If you have a high tolerance for risk and millions of dollars to invest, you may be a good candidate to own individual stocks. If you only have $1,000 to invest, a mutual fund is a better option.

When building a portfolio for your future focusing on your goals will help you determine the best strategy. How much to invest? What is your tolerance for risk? How involved will you be in managing your assets? How much time will you commit to researching new investment ideas?

A portfolio of 30 individual stocks or more is recommended for a diversified portfolio.[1] A report on Morningstar’s website suggests 18 to 20 names.[2] When individuals pick their own stocks, they focus primarily on large companies with brand name recognition like Apple, McDonald’s, or Pfizer. Few investors add small or international stocks to their portfolio.

RiskAlyze® helps investors and advisors quantify risk. The risk score for the S&P 500 is 74 on a scale of 1 to 99. A T-Bill, by comparison, has a risk score of 1. I sent a list of 20 large-cap companies to a client for review. The risk profile for the portfolio was 73, or 1 point lower than the S&P 500 Index. If the risk levels are similar, why not buy the index? The Vanguard S&P 500 fund owns 500 companies with exposure to every sector; it’s also cheaper than buying 20 individual stocks.

What about the FAANGs – Facebook, Amazon, Apple, Netflix and Google? Yes, if you owned these 5 stocks you destroyed the S&P 500 over the past 5 years. The FAANG portfolio soared 272%, bettering the S&P 500 by 205%!  How do you identify these companies in advance? The best performing stock in the S&P 500 index this year is Xerox, a stock that has underperformed the market by more than 100% for the past 10 years. Last year it dropped 30%. Xerox was probably not on your radar screen. The other stocks rounding out the top ten are Cadence Design, Advanced Micro Devices, Chipotle, MSCI, Anadarko Petroleum, Total System Services, Synopsys, Global Payments, and DISH Network. These 10 stocks have outperformed the FAANGs by 33% this year! Finding consistent winners to beat the market each year is tough – if not impossible.

Investing in large companies with brand name recognition makes sense on the surface, but it ignores a fair chunk of the global market. Vanguard’s Total World Stock fund invests 73% of its assets in large-cap stocks with 57% allocated to the United States. An all large-cap U.S. portfolio ignores bonds, small companies, real estate, gold, and international investments.

Picking individual stocks also takes time. An hour per stock, per week has been suggested. If you own 20 stocks, you’ll need to set aside 20 hours per week for research. Can you commit 20 hours per week to review your portfolio?

For most investors a globally diversified portfolio of low-cost mutual funds based on your financial goals is the best path to take.

Diversification is your buddy. ~ Merton Miller

July 5, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

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

 

 

 

[1] https://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp, Jason Whitby, June 25, 2019.

[2] https://news.morningstar.com/classroom2/course.asp?docId=145385&page=4

Fake News!

Fake News is everywhere, I think. Who knows?

Fake news is on the rise, undermining credible news stories and causing angst. It attacks people, places and things by reporting stories that aren’t true. People shoot first and ask questions later by reacting to false headlines. Online posts, media outlets, and Heads of State rant against the proliferation of fake news stories. If someone doesn’t like a post or news story, they shout: Fake News! With all the data circulating the internet it’s imperative that you spend time separating the wheat from the chaff.

Fake news is alive and well in the investing world. Here are a few examples:

  • I don’t need to save money to accumulate wealth. False. One of the largest components to your wealth creation is how much money you save and invest monthly. How much should you save? A suggested amount is 10% to 15% of your income. If you’re waiting for a lottery ticket, corporate buyout, IPO, or inheritance from a rich uncle, you may be waiting for a long time – possibly forever. Saving $1,000 per month for 30 years will grow to $1.2 million if you can earn 7% on your investment.
  • I can borrow my way to wealth. Debt is an anchor and it will hinder your opportunities to create wealth. The more debt payments you’re making, the less money you can invest. Debt is also a fixed cost and will last the life of your loan. For example, if you borrow $300,000 for 30-years at 4.5%, it will cost you $247,000 in interest.
  • I’m young, I don’t need life insurance. If you’re married with young kids, have a mortgage, a few car loans, and a student loan or two, you need life insurance. How much? At a minimum you’ll need enough to pay off all your debts. If you include the cost for college and survivor income for your spouse, it will add to the amount of life insurance you’ll need. A stay-at-home spouse needs life insurance as well.
  • I’m young so I don’t need to save money until I’m older. Dave Ramsey tells a story about Jack and Blake. Jack is 21 years old and saved $2,400 per year for nine years and then stopped investing. He invested a total of $21,600 and it grew to $2.54 million. Blake, on the other hand, started investing at age 30. He invested $2,400 for 38 years. His total investment of $91,200 grew to $1.48 million. Jack’s nest egg is more than a million dollars greater than Blake’s all because he started when he was young.[1]
  • I’m old, I don’t need to invest for growth. You may live to age 100, or beyond. A person who retires at 65 might spend 35 years in retirement. If you retire your money to a bank or money market fund when you stop working, it will lose value after you factor in inflation and taxes. At a 3% inflation rate, your dollar will lose 35% of it’s value after 35 years – a loss of 1% per year. Contrast this to an investment in Vanguard’s S&P 500 Index Fund on May 29, 1984. A $10,000 investment is now worth $398,000!
  • I can trade my way to prosperity. Day traders, market timers and speculators generate high commissions, short-term tax liabilities, but not wealth. Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% is attributed to market timing and investment selection.[2]
  • I can keep up with the Joneses. Do your friends drive Ferraris and drink Screaming Eagle Cabernet Sauvignon, but you drive a Prius and drink La Croix? If so, hanging out with your friends could be damaging to your wealth. Trying to keep up with your neighbors financially is a fool’s errand. Focus on your finances, not theirs. Who cares if your neighbor has a bigger boat?
  • I don’t need a financial plan. Have you tried taking a road trip without a GPS? Have you ever been lost on a mountain trail without a map? If you’ve ever planned a family vacation, you know the benefit of a solid plan. A financial plan will help you quantify and prioritize your goals. It will be your guide and travel companion.

Facts matter, especially when it comes to investing. Investment truth for success: Invest early, invest often, think long-term, keep you your fees low and create a financial plan.

The problem with quotes on the Internet is that it is hard to verify their authenticity.” ~  Abraham Lincoln (source: the Internet)

May 30, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

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

[1] Financial Peace University

[2] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.

Do Investment Returns Matter?

The S&P 500 rose 13% in the first quarter.  Are you satisfied or frustrated if your investment portfolio “only” made 12%?

During the quarterly review season investors want to know how well their accounts performed. Did they make money? Did they outperform the market? Will the trend continue? These are common, and logical, questions investors ask their advisors – but are they the right ones to ask?

Of course, returns matter. However, rather than focusing solely on your investment returns, you should review your financial goals and savings target. Are you saving money? Are you investing for a purpose? Do you have written financial goals? If you aren’t saving any money, your returns won’t matter. Nor will they matter if you’re not investing for a purpose like buying a new home, saving for retirement, or funding an education.

Identifying your investment goals is paramount to determining if you’re on the right track. For example, if your goal is to retire with $1 million and your current account balance is $1.2 million, you don’t need to take aggressive risks with your money. A conservative mix of investments will help you grow and preserve your wealth. On the other hand, if your balance is $250,000, you’ll need to own a growth-oriented portfolio loaded with quality stocks.

Time is also a factor. A 25-year old who saves $500 per month needs to earn 6% per year to reach $1 million in assets by age 65. A 50-year old needs to earn 25% – an unrealistic rate of return.

Investment goals and time frames are linked. Will you need your money in one year or less? If so, invest in short-term investments like U.S. T-Bills, money market funds, or CDs. These low-yielding investments will underperform stocks over time, but your goal is not to generate the highest return because you’ll need the money in the near term.

Saving for college is also time dependent – 18 years or less. If you recently had a baby, then an all-stock portfolio makes sense. As your child approaches age 18, move the assets to safer investments. When my daughter was born her account was filled with individual stocks. When she entered college, I moved half her assets to U.S. T-Bills so I could pay for her tuition, rent and food. She’s graduating from college in December and this strategy worked well.

Retirement is a primary goal for most. Saving as much as possible for your retirement is recommended. You’re allowed to contribute $19,000 per year to your 401(k). If you’re 50 or older, you can add another $6,000. You can also contribute $6,000 to an IRA. You can contribute another $1,000 if you’re 50 or older

During your next quarterly review, focus on your goals rather than your returns. Here are a few suggestions to help you transition from returns to goals.

  • Establish goals. If you don’t have a target, you can’t measure your progress. Once you document your financial goals, you’ll know if you’re on track – or not. Set up a system to monitor your progress. You can create a savings thermometer like you see at fund raising events! If you’re on track, stay the course. If not, make the necessary adjustments.
  • Increase your savings. You can’t control the stock market and returns are fleeting, but you can control how much money you save. In 2017 the S&P 500 rose 21.8%. It fell 4.4% last year. Let’s return to our 25-year old investor. She needs to earn 6% per year to reach $1 million at age 65 if she saves $500 per month. If she increases her monthly savings to $1,000, she only needs to earn 3.32%.
  • Control your spending. To retire, you need to cover your expenses. The lower your expenses, the less money you’ll need to save for retirement. For example, if your annual expenses are $100,000, you’ll need at least $2.5 million to pay for your expenses. If you can lower them to $75,000, then the amount you’ll need to save is $1.875 million. Do you track your expenses? Creating a spending goal or budget plan will help you establish your asset target. Multiply your expenses by 25 to figure out how much money you’ll need for retirement. Are you on track?
  • Adjust your asset allocation. An allocation to 100% stocks will give you the best opportunity to create long-term wealth, but it will be a bumpy ride. In 2008 the S&P 500 fell 37%. A portfolio consisting of 50% stocks and 50% bonds fell 20%. Adding bonds to an all equity portfolio will reduce your risk. What is your appropriate asset allocation? It depends on your tolerance for risk, financial goals, and time horizon. You can click on this link to identify your risk tolerance: https://clients.riskalyze.com/risk-questionnaire/questionnaire-intro
  • Big wins. The largest investment in your account will have the biggest impact on your returns. My parents best performing stock has been Starbuck’s, it’s also their smallest position. It has little impact on their account. Denmark’s stock market has outperformed the U.S. market by 4% per year for the past 20 years. Denmark accounts for 1% of the global market capitalization while the U.S. accounts for 54%.[1] When U.S. stocks move it makes an impact, not so much with Denmark.

It’s important to generate positive long-term returns, but it’s more important to have financial goals. Take some time to identify your goals so at your next quarterly review meeting you can focus on your progress.

Risk comes from not knowing what you’re doing. ~ Warren Buffett

May 9, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

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

[1] Dimensional 2019 Matrix Book

The Masters

Tiger Woods roared to life by winning the 2019 Masters – his fifth green jacket.  He last won at Augusta in 2005 and it’s his first major win in 11 years. Athletically, his win marks one of the greatest comebacks in all of sports.

His trials and tribulations are well documented, and few people gave him much of a chance of returning to glory. After his fall from grace, experts weighed in on his golfing future:

Stephen A. Smith, “His short game is gone. His health is gone.”[1] Mr smith is now suggesting “Tiger will catch Jack Nicklaus for the most major wins.”[2]

Jamele Hill said his next press release should be, “I’m retiring.”[3]

Colin Cowherd considered him a “former golfer.”[4]

Shannon Sharpe added, “He will never, ever be that guy again.”[5]

It takes perseverance and courage to pursue your goals after an 11-year dry spell. It’s even harder when people are telling you to quit and you’re a has been, but he kept swinging. Several sponsors dropped him after his fall including AT&T, Accenture, PepsiCo, Proctor & Gamble and Tag Heuer. Nike, Bridgestone Golf Balls and Taylor Made, however, stayed the course with Mr. Woods and they were rewarded when he conquered Augusta on Sunday.[6]

Investors would be wise to follow his lead, especially when it comes to perseverance. A few investment sectors have been out of favor for a long time, even decades. The urge to move your money from underperforming sectors may be high, but history tells us this may be a mistake. Ask Tiger.

Let’s look at a few investment categories in need of a win.

International Investments. Foreign markets have trailed U.S. stocks for the past 1-, 3-, 5- 10-year periods – by a lot. A $10,000 investment ten years ago in the Vanguard S&P 500 index fund (VOO) is now worth $26,280. By comparison, the same investment in the iShares MSCI EAFE ETF (EFA) is only worth $12,830 – a difference of $13,450. International stocks account for about 48% of the world’s market capitalization, so an allocation to this sector still makes sense.

Value Stocks. Growth stocks have outperformed value stocks over the past 1-, 3-, 5-, 10-, and 25-year periods.  Value stocks did outperform during the lost decade of the 2000s. What is a value stock? Some popular names include Johnson & Johnson, Exxon Mobile, Pfizer, AT&T, Walmart, and IBM. Growth names include Apple, Amazon, Microsoft, Facebook, Disney, Netflix and Mastercard.

Fixed Income. Stocks have trounced bonds for the past 92 years by a ratio of 49 to 1. A dollar invested in stocks in 1926 is now worth $7,025. The same dollar invested in bonds grew to a paltry $142. Bonds have shown brief moments of brilliance by rising 25.9% in 2008, 27.1% in 2011, and 24.7% in 2014. Despite their lackluster returns and low yields, bonds are needed for safety and liquidity, especially during times of stock market turmoil.

In hindsight, allocating 100% of your portfolio to U.S. large-cap growth stocks makes sense. But this is not a prudent strategy for most investors. Dating back to 1992, the Vanguard Growth Index fund (VIGIX) generated an average annual return of 9.7%, but it fell 58.5% during the Tech Wreck (2000 – 2002) and 49.6% during the Great Recession (2007 – 2009). During the fourth quarter of last year it fell 19.8%. Not many investors would have had the courage, or foresight, to stay invested during those tumultuous days.

At times we must walk through the valley to reach the mountain top. During the dark days it takes faith and fortitude to hold on for better days. To be a successful investor, focus on the long term, ignore the noise, diversify your holdings, invest often, rebalance annually, and keep your fees low.

So, tee it up and invest for the win.

Not only so, but we also glory in our sufferings, because we know that suffering produces perseverance; perseverance, character; and character, hope.  And hope does not put us to shame, because God’s love has been poured out into our hearts through the Holy Spirit, who has been given to us. ~ Romans 5:3-5

April 16, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

[1] Skratch TV, https://www.youtube.com/watch?v=Fue0sQs5jtI, website accessed 4/15/19.

[2] http://www.espn.com/golf/, accessed 4/15/2019

[3] Skratch TV, https://www.youtube.com/watch?v=Fue0sQs5jtI, website accessed 4/15/19.

[4] Ibid

[5] Ibid

[6] https://www.wsj.com/articles/tiger-woods-rewards-nikes-loyalty-with-masters-win-11555351215?mod=searchresults&page=1&pos=1, April 15, 2019, Suzanne Vranica and Khadeeja Safdar

Beware Ten Year Track Records

Mutual fund companies and asset managers will start touting their 10-year performance record with dazzling numbers. The marketers will try to lure you in based on their outsized performance. But, before you invest, dig deeper. Ask to see their 15-year track record. If they don’t have one, review their performance from 2008. How did the fund perform during the Great Recession?

These companies are rejoicing, as they should, because it’s March 2019 and they’re now able to report their 10-year track record without including the disastrous year of 2008. The bear market is finally in the rearview mirror for reporting purposes.

How significant is this change? Well, the 10-year average annual total return for the S&P 500 from March 2009 to 2019 has been 16.5%. By comparison, the 10-year return ending 2018 was 7.13% – a difference of 9.37%! Since 1926 the S&P 500 Index has averaged 10%, so the recent returns are well above the historical average.

Of course, the returns are what they are, but they’re exaggerated due to the sharp sell-off during the Great Recession when the S&P 500 Index fell 53%. The index bottomed on March 9, 2009 and then it went on an extraordinary run for the next 10 years, rising 317%! If, and it’s a big if, you invested $10,000 at this juncture it would be worth $41,750 today.[1]

Despite these outsized gains a majority of U.S. Large Cap Funds still underperformed their index. In fact, only 10.9% of actively managed mutual funds beat their index over the past 10 years. The funds with the lowest cost did slightly better as 17.3% of this group beat the index. However, funds with high fees were destroyed as only 2.1% managed to do better than the market.[2]

Here are a few suggestions to help you build a mutual fund portfolio.

  • Invest in low-cost mutual funds managed by Dimensional Fund Advisors or Vanguard. Adding Exchange Traded Funds (ETFs) from Blackrock or Vanguard will help keep your costs low.
  • Diversify your assets across large, small and international funds. Adding bonds and real estate holdings will further diversify your portfolio.
  • Build your portfolio around your financial goals and risk tolerance. These two ingredients will help determine your asset allocation.
  • Time is your friend when investing in the stock market. A time horizon longer than five years should include a heavy dose of equity funds.
  • Rebalance your investments once or twice per year. This will keep your asset allocation and risk tolerance in check.
  • Review past returns for as long as the data is available on your fund. You can research this data on several sites including Yahoo! Finance, Morningstar, YCharts, or the Wall Street Journal.
  • Analyze the fee structure. Avoid funds with a front-end sales charge, a deferred sales charge, or a 12b-1 fee.
  • Incorporate a buy and hold philosophy. Don’t fret the daily fluctuations in the market or listen to the “experts” about the pending correction.

This past decade has treated investors well. What will the next decade bring? Who knows, but if history is a guide, it will be a good one.  Stay invested my friends.

I can only control my own performance. If I do my best, then I can feel good at the end of the day. ~ Michael Phelps

March 20, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. Past performance does not guarantee future results.

 

 

 

 

 

 

 

[1] YCharts – March 9, 2000 – March 20, 2019

[2] https://office.morningstar.com/research/doc/Feb%2007%202019_US_ActivePassive_Barometer_-_7_Takeaways_from_the_2018_911724, Ben Johnson, 2/7/2019