A Billion Dollars A Year

How would you spend a billion dollars? Would you create a foundation? Would you run for President? Would you try to send a rocket to Mars? Would you purchase priceless art?

The top five hedge fund managers last year earned more than a billion dollars in salary, with an average pay of $1.48 billion. A group of fifteen hedge fund managers made more than $12 billion.[1] Hedge fund managers typically charge a 2% fee on your investment and take 20% of your profits as compensation. The S&P 500 rose 29% last year, without fees. If you invested $10,000,000 in a hedge fund and your account appreciated 29%, your manager’s compensation would have been approximately $780,000, or 7.8% of your original investment.

Last year was a phenomenal year for major asset classes, so your hedge fund manager should be compensated well for his (the top five hedge fund managers are all men) efforts. How did they perform? The five hedge fund managers, as a group, generated an average return of 24.6%, before fees.  The best of this elite group returned 41%, the worst returned 14%.[2]

On a gross basis, the top five underperformed the S&P 500 by 4.4%. Two of the five outperformed the index, and only one bettered it on a net basis. If the average return was 24.6% and their fee was 7.8%, then the net gain was 16.8%. Last year, several low-cost ETFs performed well: Real Estate returned 24.4%, Utilities 21.3%, Small Caps 21%, International Stocks 18.1%, Gold 17.9%, and Emerging Markets 16.7%.[3] An equal weighting of these ETF’s returned 19.9%.

Fees matter when it comes to investing because you can only spend net returns. How do you know what fees you’re paying? Here are a few suggestions.

  • Every publicly traded investment has a ticker symbol, and if you plug it into Yahoo! Finance, Morningstar, or any other financial site, you’ll be able to see the fees associated with your investment. Every Mutual Fund and Exchange Traded Fund has an operating expense ratio (OER). For example, the OER for Vanguard’s S&P 500 Index Fund (VOO) is .03% or $3 per $10,000 invested.
  • Registered Investment Advisors must file their Form ADV each year. The ADV outlines an advisor’s fee schedule, assets under management, and other vital information. If you work with an advisor, they’ll provide you with their form.
  • Broker sold insurance items, and other packaged products are delivered with a prospectus. The prospectus summarizes the fee schedule, including sales charges, surrender fees, 12b-1 fees, and additional fees.
  • Brokerage firms post their commission rates and schedule online.
  • Conduct a fee audit with your advisor. Your advisor should be able to review your investment holdings, account fees, and other charges to help you get a better handle on your costs.

Registered Investment Advisors must disclose their fees to you before you invest, brokers should do the same. If you’re not sure what fees you’re paying, ask. It’s your money. I’ve noticed firms that charge high fees say they’re adding value to their clients. If you’re working with one of these firms, ask them how they’re adding value. If they can’t explain it to you, maybe it’s time to hire a new advisor.

One of the best ways to add value to your bottom line is to work with a Certified Financial Planner™ who invests your money in a globally diversified portfolio of low-cost funds and offers financial planning.

Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor. ~ Romans 13:7

February 17, 2020.

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.

[1] https://markets.businessinsider.com/news/stocks/hedge-fund-managers-earned-more-than-billion-last-year-highest-2020-2-1028894639, by Ben Wick, February 11, 2020

[2] Ibid

[3] YCharts: VNQ, VPU, IJR, EFA, GLD, & VWO 2019.

China and Emerging Markets

China is closed. The world’s second-largest economy is shut down due to the Coronavirus, and life is at a standstill. According to several news reports, the number of deaths from the virus has now surpassed the number of deaths from SARS – a frightening thought, and the uncertainty is making the situation worse.

China’s idleness will have, at some point, an impact on global economies and stock markets. The Chinese stock market is down .5% for the year, but this can change quickly.

Emerging markets and China are linked. Chinese stocks are 33% of the MSCI Emerging Market Index, so when China moves, so does the index. The index invests across five regions, 26 countries, and 1,100 securities.[1] Dimensional Funds, Fidelity, and Oppenheimer manage sizeable emerging market mutual funds, while Vanguard, Blackrock, and Schwab have substantial assets in their exchange-traded funds. The top holdings for most of these funds include Alibaba, Tencent, Taiwan Semiconductor, and PingAn Insurance Group.

The Matthews China Investor Fund (MCHFX) has produced an average annual return of 11.51% for the past twenty years, and it has a current asset allocation of 95% stocks, 5% cash. Most of their assets, 89%, are invested in Asian emerging markets.

Chinese stocks account for 3% of the global equity market capitalization, the same level as France and Canada.[2]  We recommend an allocation of 5% to emerging markets, so if Chinese stocks account for 33% of the index, our exposure to China is 1.65%. If Chinese stocks fall, the index will too. However, I’m willing to commit 1.65% of capital to the world’s second-largest economy.

During the AIDS epidemic from 1987 to 1995, the emerging markets index fell 6.7%, Chinese stocks dropped 40%, and the S&P 500 rose 34.9%.

Emerging markets rose 13.8% during the Bird Flu outbreak from 1997 to 2004. Chinese stocks plunged 65.6%, the S&P 500 rose 63.6%.

The emerging markets index rose 122% during the SARS epidemic from 2002 to 2005, while Chinese stocks climbed 74%, and the S&P 500 index grew 8.7%.

During the Swine Flu outbreak from 2009 to 2010, emerging markets soared 103.1%, Chinese stocks increased by 62.5%, and the S&P 500 was up 39.2%.

The Ebola outbreak occurred from 2013 to 2016. During this outbreak, emerging markets fell by 18.2%, Chinese stocks dropped 6.8%, and the S&P 500 rose 57%.

The United States stock market is massive, efficient, and developed, but it’s not immune to extended periods of poor performance. During the ‘70s, a 10,000 investment grew to $11,570, generating an average annual return of 1.47%. If you invested $10,000 in the S&P 500 on January 1, 2000, you had to wait thirteen years before you were profitable. But, if you held on to your original $10,000 investment from 1970, it’s now worth $357,820, producing an average annual return of 7.35%.[3]  For the past two decades, the S&P 500 and MSCI Emerging Markets Index produced similar returns.

Emerging markets have always been volatile – a feast or famine mentality. In 2006, Chinese stocks rose 82.9%. in 2008, they fell by 50.8%. Turkey rose 253% in 1999, and fell 45.8% in 2000, 32.8% in 2001, and 35.8% in 2002.[4] Volatility is the central theme for investors in emerging markets.

Does it make sense to sell all your emerging market holdings? My recommendation is to stay committed to this sector. Another reason to remain long emerging markets is demographics. China, India, Indonesia, Pakistan, Brazil, Russia, and Mexico account for 49% of the world’s population – and growing![5]

Rather than selling your emerging market stocks, invest in a globally diversified portfolio of low-cost funds, investing in an assortment of stocks and bonds based on your financial goals and time horizon.

What should you do if emerging markets fall? Buy more!

Nevertheless, I will bring health and healing to it; I will heal my people and will let them enjoy abundant peace and security. ~ Jeremiah 33:6 

February 10, 2020.

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.

 

 

 

[1] https://www.msci.com/emerging-markets

[2] Dimensional Fund Advisors 2019 Matrix Book

[3] YCharts.

[4] Dimensional Fund Advisors 2019 Matrix Book

[5] https://www.internetworldstats.com/stats8.htm

I Missed Tesla

Tesla’s stock performance has been electrifying, rising 20% yesterday, 15% today, and 86% for the year. Since June, it’s soared 415%. On August 7, 2018, Elon Musk tweeted, “Am considering taking Tesla private at $420. Funding secured.”[1] Tesla’s stock is up 142% from this now infamous tweet.

Initially, I missed several “obvious” winners over the past three decades, like Apple, Google, Microsoft, Amazon, and so on. I did, however, eventually buy these stocks. In 1993 I purchased DELL Computer in my IRA and quickly doubled my money. After it doubled, I sold it so I wouldn’t lose my profit. DELL would rise another 20,000% or so over the next several years, a valuable lesson to let your winners run.

I’m not worried I missed Tesla, because I own it indirectly through several funds. Who knows what’s ahead for Tesla, but if it follows the path of previous highfliers, I may get another opportunity to buy it at a lower price. When I started in the business as a stockbroker, I recommended Coca Cola stock to clients, despite the fact it went public in 1919, 71 years before I started. Coke stock has risen over 1,000% since January of 1990[2], so investors still made money despite its strong performance during the previous seven decades.

Missing a winning stock doesn’t cause me any regret because I’ve also passed on losers like Enron, Worldcom, Global Crossing, Gamestop, and several others. In a diversified portfolio of individual stocks, you’ll probably own a few winners, a few losers, and numerous also-rans. A winning stock like Amazon or Tesla can have a significant impact on your portfolio. A losing stock, likewise, will be an anchor, dragging your performance down.

Tesla is a popular stock, getting most of the headlines and screen time on CNBC, but other stocks are performing better this year. Nanoviricides is up 331%, LMP Automotive Holdings Inc is up 114%, and Interups is up 110%.[3] Owning mutual funds will give you exposure to companies not on your radar screen.

What should you do if you’ve missed a highflying stock that everybody else appears to own? Here are a few suggestions.

  • Be patient. What goes up will come down. Amazon stock fell 92% in 2001 and 60% in 2008. Apple fell 85% in 1985, 82% in 1997, 79% in 2003, and 56% in 2008. Facebook fell 54% in 2012 and 38% in 2018.[4] Stocks fluctuate and oscillate between over and undervalued.
  • Buy fewer shares. If your goal is to buy 100 shares, start with 50 or 25.
  • Buy a fixed dollar amount. Rather than focusing on shares, start with dollars. A prudent allocation is 3% to 5% of your account balance.
  • Set a limit. Enter a buy-limit to purchase the stock at a specific price. You can set any price you want, but you must buy the stock if it trades at or below your limit price; however, you’re not guaranteed to get the stock at the price you set.
  • Sell a put option. Selling a put option obligates you to buy shares at a specific price. Because you’re a seller, you’ll collect a premium. The premium is yours to keep, regardless of what happens to the price of the stock. For example, Tesla’s April 2020 $500 put option is currently selling for $6.75, meaning, for every contract you sell, you’ll collect $675, before fees. One option contract equals 100 shares of stock, so if you sold one contract at $500, you’re obligated to buy it at that price if the stock trades at or below the strike price when the contract expires in April – 100 shares of Tesla at $500 is a $50,000 purchase. If you’re going to pursue this strategy, please work with an advisor who understands option trading, because options involve risk, and they’re not suitable for every investor.
  • Buy a mutual fund. The following mutual funds own shares of Tesla: Baron Partners (BPTUX), Harbor Capital Appreciation (HRCAX), Vanguard Extended Market (VEXMX) and Invesco QQQ Trust (QQQ)

Chasing a high-flying stock is a risky proposition, so develop a trading plan and tread lightly. Don’t over commit capital and avoid leverage. Be patient, and work your plan.

“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.” ~ Peter Lynch

February 4, 2020.

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.

 

 

 

 

 

 

 

[1] https://www.cnbc.com/2019/08/08/teslas-chaotic-year-after-musks-funding-secured-tweet.html, By Michael Wayland, August 8, 2019.

[2] YCharts: January 1, 1990 – February 3, 2020.

[3] YCharts

[4] Ibid

A Flight to Safety

This decade is off to a tough start. The Coronavirus is disrupting global trade, travel, markets, and economies. The 2020 U.S. Presidential election will also add to the uncertainty and confusion. With increasing risk, should you buy, sell, or hold your existing investments?

When forecasts are dire, and projections are bleak, selling your stock positions and moving to cash makes sense. It seems prudent to sell your investments and park the money in a bank until the storm passes, and, when it does, you can repurchase your stocks.

Let’s say, for fun, you invested $1 million in the S&P 500 in 2005 – 100% of your assets. After three years, your strategy paid off. Your account at the end of 2007 is worth $1.172 million, a gain of 17.2%![1]

Here’s where it gets interesting because, we now know, 2008 was a horrible year for the S&P 500. If you decided to hold, you lost 38.3%. Your original investment of $1 million is now worth $747,392, a loss of 25.2%.

With hindsight, you would have sold your investment on December 31, 2007, to lock in your gains. If you sold, you would’ve been a hero, admired for having the foresight and courage to sell after three years of substantial profits. However, it’s unlikely you would’ve moved from cash to stocks in January of 2009 because we were in the midst of the Great Recession. You probably would have waited two or three more years to get back in the market, missing a 40.5% return. If you reinvested in January 2009, you made 23.6% for the year. If you had the conviction to buy the dip in 2008 and 2009, you made even more when stocks recovered.

If you ignored the bear market and held your stocks during the correction of 2008, you made $2.76 million from 2005 to the year-end of 2019, an increase of 227%. Now that your account balance is $2.76 million, what should you do -sell or hold? If you sell, you’ll pay a capital gains tax of 20%, or $455,243 – a significant number. If you hold, you may encounter another stock market correction. A repeat of 2008 would mean a loss of $1.25 million, but still above your original investment of $1 million.

It’s impossible to time the market, but they’re a few strategies you can employ to protect your assets. The first is to diversify your holdings to include different asset classes like small companies, international stocks, and bonds. A globally diversified portfolio of mutual funds would have lost 20.3% in 2008, not great, but better than a loss of 38%. True, you give up some upside, but you protect your assets to the downside. A balanced portfolio of 60% stocks, 40% bonds generated an average annual return of 6.5% since 2005. Your $1 million investment grew to $2.48 million.[2]

More stock means more risk, but it also means more reward. Buy and hold investors have been rewarded for their patience, and, hopefully, this time will not be different.  If you want to find out the risk exposure in your portfolio, give us a call.

“Go out on a limb. That’s where the fruit is.” — Jimmy Carter

February 3, 2020.

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.

 

 

[1] YCharts – IVV, 1/1/2005 to 12/31/2019.

[2] Morningstar Office Hypothetical

Rivers and Tributaries

The Mighty Mississippi, The Nile, The Amazon, and The Yangtze are some of the longest rivers in the world, traveling thousands of miles, moving millions of gallons of water every day; critical components to commerce as millions of people, and billions of dollars of freight go up and down the rivers.

The names of significant rivers are known to most people, but what about tributaries? Tributaries are smaller rivers flowing into larger ones, and vital to the support of the more extensive river system. The Big Muddy, Chippewa, and Watab are a few rivers flowing into the Mississippi. Without smaller rivers, bigger ones can’t survive.

Open an atlas, and you’ll discover hundreds of little blue lines crisscrossing the map. These blue lines represent rivers and streams. The Rio Grande borders Texas to the south; the Red River is to the north. In between, thousands of tributaries pour into more significant rivers and the Gulf of Mexico. Some of these dry creek beds will lay dormant until the rain arrives, turning them into raging rivers.

In the investment world, the two leading indices are the Standard & Poor’s 500 and MSCI EFA. The S&P 500 includes the 500 largest companies in the United States. The MSCI EFA is the international index encompassing Europe, Australia, and Far East Asia and includes companies from 21 different countries.[1] These two indices cover the world, and most professional investors rely on them for their primary benchmarks. However, building a portfolio consisting of two broad-based indices isn’t prudent, especially ones so similar.

As small streams are essential to mighty rivers, small stocks are important to bigger ones. A globally diversified portfolio of different sized stocks and bonds will allow you to benefit from thousands of securities scattered around the world.

The past few years, small and international stocks have trailed large U.S. companies, but it won’t last forever. At some point, these sideshows will turn into the main attraction, just like small creeks turning into raging rivers. For the past three years, the S&P 500 has returned 47%, the S&P 600 Small-Cap Index 26.2%, and the MSCI EAFE International Index 19.2%. However, from 2000 to 2010, the Small-Cap Index returned 48%, and the MSCE EAFE International Index rose 30% while the S&P 500 lost 6.5%.[2]

Morningstar tracks over 83,000 global indices[3], so it’s possible to get carried away when building your portfolio. A narrow focus may limit your investment choices, too many, and your account will be overly diversified.

How many different asset classes should you include in your account? At a minimum, your portfolio should consist of large, small, and international stocks, bonds, cash, and an alternative class – so six. Of course, this number can vary dramatically depending on several factors, like your risk tolerance, assets, and time horizon. The broad categories can also include growth, value, developed, emerging, short-term, long-term, high yield, and so on.

Regardless of the number of funds, focus on owning a globally diversified portfolio of low-cost funds based on your financial goals.

If you’re not sure where to start, contact a Certified Financial Planner® who can help you navigate the treacherous waters of the financial markets.

A river is more than an amenity; it is a treasure. ~ Oliver Wendell Holmes

January 21, 2020

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.

[1] https://www.msci.com/documents/10199/822e3d18-16fb-4d23-9295-11bc9e07b8ba

[2] YCharts

[3] Morningstar Office Hypothetical

Ice Cream and Investing

My friends and I would ride our bikes (Schwinn’s) to Thrifty’s Store to get ice cream. Thrifty’s ice cream was the best, and it was economically priced for young kids – 5 cents for a single, 10 cents for a double, 15 cents for a triple. Thrifty’s used an ice cream gun to produce near-perfect cylinders, ideal for stacking a triple scoop in a sugar cone. My three go-to flavors were mint chip, chocolate chip, and rocky road – in that order. I had no desire for peach, strawberry, or vanilla. Thrifty’s, at the time, only had about ten flavors, so if my friends wanted more variety, we’d ride to Baskin-Robbins. I would still order my three favorites, however.

Ice cream and investing have much in common because it has something for everyone — some like vanilla, others chocolate. Individual stock pickers might spend hours doing research, reading reports, talking to companies, or listening to analysts hoping to find a unique flavor at a bargain. Or worse, they may watch an expert on TV talking about ice cream, and without any knowledge, they buy gallons of the flavor before tasting it because some guy told him it was going to be good.

Mutual fund investors rely on others to choose the ice cream for them, regardless of flavor. The investors give up the right to select peach or mocha because the flavors are handpicked by the money manager. A mutual fund ice cream owner will get the best flavors, and the worst. In addition to my three favorite flavors, I will also get ones I don’t like. However, the tasty flavors will outnumber the bad ones, and over time, the bad ones will go away.

Trying to pick individual stocks is challenging because you’re continually searching for the next big winner on a limited budget. Today if you decide to buy several ice cream cones with a dollar, you’re not going to get many, or any. And, if you’re fully invested, you must sell one stock to buy another. Do you sell vanilla to buy chocolate? Trading stocks can be expensive, and it’s not tax efficient.

Owning a globally diversified portfolio of low-cost mutual funds is a better solution for most investors because you can own several thousand stocks and, gasp, bonds. I prefer not to eat strawberry ice cream, but millions do. If my mutual fund owns strawberry ice cream, I win even if I don’t eat it. My globally diversified portfolio gives me exposure to stocks on the other side of the world that I would not have chosen myself. Chinese people like black sesame ice cream, Indians want jackfruit, and Swedes prefer ice cream with lingonberries[1]. If I didn’t own a global portfolio, I would miss out on these distinctive flavors.

Here are a few reasons to own a globally diversified portfolio of low-cost mutual funds.

  • Your investment portfolio is a function of your goals, whether you’re aggressive, conservative, or somewhere in between. If your investments match your goals, you’re more likely to hold on to them regardless of market conditions allowing you to capture the upward trend in the stock market.
  • Your costs will go down because you won’t need to trade because your account is being managed for the long haul by your fund managers.
  • Mutual fund companies are in a trade war as they compete against each other to lower their fees. Their pain is your gain. Schwab, Fidelity, Vanguard, and T.D. Ameritrade each have waived their trading commissions. Dimensional Fund Advisors is lowering fees on 77 of their funds. The cost of their U.S. Large Company Portfolio is dropping 40%![2]
  • A balanced portfolio will remove your investment bias and tendencies. I prefer buying large companies with growing dividends, but I also need to own small international growth companies that don’t pay any dividends. A global portfolio allows me to hold a variety of stocks, especially ones I would never buy on my own.

I own a globally diversified portfolio of low-cost mutual funds because it allows me to enjoy my life and focus on things I want to do, like eat ice cream.

I scream, you scream, we all scream for ice cream! ~ Howard Johnson

January 7, 2020

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.

 

 

 

 

 

[1] https://www.zagat.com/b/crazy-ice-cream-flavors-around-the-world, by Linnea Covington, June 1, 2016.

[2] https://www.barrons.com/articles/dimensional-fund-advisors-enters-the-asset-management-fee-war-51577137749, by Evie Liu, December 23, 2019

If, Then

In college, I learned the if, then command while studying the BASIC computer language. BASIC is a conditional language that relied on the if command. If X is true, then Y is false, and so.

Financial planners rely on if, then statements regularly. It’s common for planners to include a statement like, “If you invested X amount in stock Y, then you’d have Z dollars today.” The examples show investors the advantage of long-term investing, despite the stock market’s gyrations. Some of the examples are outrageous, but we still use them anyway. For example, if you invested $100,000 in the stock market in 1926, you’d be worth more than $700 million today. This example is ridiculous on many levels. First, $100,000 in 1926 is equivalent to $1.5 million today. Second, would you have held on to your investment through the Great Depression? Doubtful. Third, it assumes you didn’t pay any taxes on your investment or spend any money for 93 years.

Despite the crazy claims, advisors use these examples religiously, including me.

Here are a few if, then statements.

If you invested $100,000 in Amazon in 1997, you’d have $92 million today.[1]

If you invested $92 million in Enron, you’d have zero dollars today.

If you sold stocks last December because the market was down 15%, you missed a 36% return in the S&P 500 this year.

If you sold bonds last year because you expected the Federal Reserve to raise interest rates this year, you missed a 13.7% return in long-term bonds through the iShares 20+ Year Treasury Bond ETF (TLT).

If you create a budget, it will help you with your spending.

If you spend less than you earn, you’ll save money.

If you save money, your assets will grow.

If you try to keep up with the Joneses, you’ll end up in the poor house.

If you make a Will or a Trust, you’ll protect your family.

If you own life insurance, you’ll also protect your family.

If you own long-term care insurance, you’ll protect your assets if you move into an assisted living facility.

If you participate in a high deductible health insurance program, consider opening a Health Savings Account to offset the cost of healthcare.

If you’re going to live in your city for five years or more, buy a home.

If you have a mortgage, add a few dollars to your monthly payment so you can pay it off early.

If you move often, rent a home.

If you have children, invest early and often so you can pay for some, if not all, of their college education.

If you work for a company that offers a retirement plan, contribute as much as possible so you can eventually enjoy your retirement.

If you have financial assets to meet your spending needs, defer your Social Security benefits until age 70 so you can qualify for the maximum benefit allowed.

If you have any assets, consider donating to a charity or causes you and your family support.

If you own an IRA or workplace retirement plan, check your beneficiaries to make sure they’re current.

If you complete a financial plan, you’ll have three times more assets than those people who do little or no planning.[2]

If you work with a Certified Financial Planner®, they will put your interest first.

If you finished reading this blog, thank you and Merry Christmas!

“First, solve the problem. Then, write the code.” – John Johnson

December 17, 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.

 

 

 

 

 

 

[1] Morningstar Office Hypothetical

[2] http://www.nber.org/papers/w17078

Friends

Friends was a favorite television show of mine. Each Thursday night, I was glued to the TV to watch the eclectic mix of characters – Rachel, Phoebe, Joey, Monica, Chandler, and Ross. They made me laugh for ten years. The show worked because each character had unique and special talents. One of my favorite episodes was when Joey put on all of Chandler’s clothes while getting ready for Ross’s presentation.[1]

Friends come to us from all corners of our life. Friends from school, church, work, the neighborhood, and so on.  Depending on where we are in our life our friends enter our lives at various stations. Some are lifelong friends who see us at our best and our worst. Others are seasonal. Friends can live next door or in different towns, in different states, or distant lands. You might talk with them daily, or once a year. Regardless, a good friend is worth their weight in gold.

I have friends that I’ve known since kindergarten, others I met in junior high, high school, or college. I’ve had great work friends. Friends from mission trips and others from the states where I’ve lived.

Long-term friendships require work and patience, but it’s worth the effort. It’s challenging to maintain relationships for decades because your friends know your hot buttons. They see you on your good days and your bad ones. They’re by your side through thick and thin, celebrating your wins and consoling you in defeat. Holding stocks for a long time also takes work and patience. I’ve owned Disney, Microsoft, and Pepsi for years, and all three have caused happiness and sorrow. It’s easy to own a stock like Amazon when it’s up 17%, but how about when it’s down 94% like it was during the Tech Wreck in 2000?[2] To benefit from the upward trend in stocks, you must own them deep in the valley and at the peak.

Short-term relationships are seasonal. You might meet a friend on a mission trip or business conference. It could be a former neighbor who moved to a new state. Short-term friendships are beneficial regardless of their duration. Investments held for a limited time can enhance or protect your portfolio. Using options to generate income or protect a holding makes sense at times. Stocks can come and go, as well. You might buy a stock for a short-term trade or a seasonal trend. Stocks like Walgreens or Cisco will make occasional appearances in my portfolio, depending on their price.

And, unfortunately, some friendships turn toxic and blow up, never to return. Companies like Enron and Worldcom were friends to many during their glory days before they imploded and wiped out all their shareholder capital. For a moment in time, they were must own investments because of their meteoric returns despite their deteriorating financials.

The cast of Friends had six primary characters in front of the camera, and countless support personnel behind it. For your investment portfolio to succeed, a supporting cast is necessary. Relying on Certified Financial Planners®, attorneys, CPAs, money managers, and other professionals will pay dividends towards increasing your wealth.

Let’s review a portfolio of six different investments to see how they performed these past few years. The funds, a mix of distinct asset classes, have unique attributes designed to react differently depending on the market conditions.  The portfolio dating back to 1993 generated an average annual return of 9.63%. The portfolio’s best year was 2003, up 27.03%. The worst year was 2008, down 18.24%. This year it’s up 21.02%. During the past 16 years, it had three down years, and it rose 83% of the time.[3]

Here is the portfolio:

IVV = S&P 500 = 30%

EFA = International = 20%

TLT = Long-Term Bonds 30%

IJR = Small Caps = 10%

EEM = Emerging Markets = 5%

IYR = Real Estate = 5%

Though the portfolio performed well over the past 16 years, the returns for the individual holdings varied. For example, the small-cap, large-cap, and real estate sectors performed well over the past decade while bonds, international and emerging markets lagged. This past year, however, bonds have outperformed the other asset classes.  The leaders and laggards constantly trade the top spot, like horses in a race.

If every character of Friends were the same, the show would not have done well. The variety of actors is what made the show special. If you own similar investments, it’s not diversified, and it will not perform well over time. A diversified portfolio of low-cost funds should treat you well, like a good friend.

A friend loves at all times, and a brother is born of adversity. ~ Proverbs 17:17

December 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. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

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

 

 

 

[1] https://mashable.com/article/best-friends-episodes/

[2] YCharts

[3] Morningstar Office Hypothetical – 1993 to 2019.

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.