Tag: Savings

The Best Investment Strategy Ever!

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

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

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

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

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

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

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

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

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

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

The Ants shrugged their shoulders in disgust.

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

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

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

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

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

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

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

May 22, 2021

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

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

[1] $500 monthly investment at 10% before taxes and fees.

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

The Beauty of Cash

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Cash is wonderful. Simple. Humble. It never boasts when times are good, nor complains when times are tough. Cash is an asset like stocks or bonds or real estate, but it doesn’t get any respect – like Rodney Dangerfield, but it should, particularly when the stock market and economy are struggling.

CEOs who hold large amounts of cash get ridiculed for not deploying it to acquire other companies, buy back their stock, or pay a dividend to shareholders as if holding cash was a sign of weakness.

Warren Buffett, CEO of Berkshire Hathaway, holds $128 billion in cash, and it has been suggested he “buy blue-chip stocks, invest in Boeing, or provide rescue financing to companies in the travel industry.”[1] Instead, Mr. Buffett recently sold all his airline stocks to raise more cash. Mr. Buffett has made his billions by investing for the long haul, being patient, and utilizing cash.

Tim Cook, CEO of Apple, has also been criticized for carrying too much cash on the balance sheet. Apple currently has more than $100 billion in cash and short-term investments, and he has been urged to buy other technology companies. Fortune thought Mr. Cook should have purchased Netflix last year, calling it “his biggest blunder so far.”[2] A money management firm posted an open letter on its website to Apple and Tesla, suggesting they merge, saying, “Apple lost its innovative soul when Steve Jobs passed away in 2011.”[3]

Berkshire Hathaway and Apple have pristine balance sheets that must be praised, not mocked. Companies and CEOs who pay attention to the bottom line can survive recessions and depressions.  If two iconic investors are holding billions of dollars in cash, shouldn’t we pay attention? Is it time to give cash some respect?

What is cash? Cash can be dollars you carry in your wallet or keep in your bank. It can also include short-term certificates of deposit or US Treasury Bills.  Any liquid, guaranteed investment maturing in one year or less is considered cash, at least for investment purposes. A money market will invest in short-term obligations, so you can park your money in a money market fund as well.

As interest rates approach zero, does allocating a portion of your assets to cash still make sense? It does. Despite low rates, cash is liquid and safe like few other investments.

Cash does have a downside. As a long-term investment, it does not hold up, and it will barely keep pace with inflation. Investing in stocks is still the best way to create generational wealth, but if you need to preserve your wealth in the near term, invest in cash. If your time horizon is five years or more, allocate most of your assets to stocks.

What can you do with your cash? Here are a few ideas.

  • Emergency Fund. Your emergency fund should have enough money to cover three to six months of expenses. If your household expenses are $10,000 per month, your emergency fund balance should be $30,000 to $60,000. During challenging economic times, you might want to increase your fund balance to cover nine to twelve months of expenses.
  • Opportunity Fund. Setting aside money for opportunities is also recommended. How much money is appropriate for this fund? It depends on what you want to buy or where you want to go.
  • If you are within five years of retirement, my recommendation is to keep three to five years of expenses in cash. If your annual household expenses are $100,000, your cash balance should be $300,000 to $500,000. A large cash balance allows your stocks to recover if you were to retire during a down market like we are experiencing today.
  • Purchases. If you need to buy a car or pay for college tuition, keep your money in cash regardless of the time frame. Also, allocate your money to cash if you need it in one year or less.
  • Borrowing. It’s common for people to rely on debt to finance cars, homes, education, etc. But what do you do if your bank freezes your credit? Wells Fargo has stopped issuing home equity loans, and they will only refinance jumbo mortgages for clients who hold at least $250,000 in liquid assets with their bank.[4] A cash balance gives you access to your capital regardless of your bank’s internal policies.
  • Risk Reduction. Allocating a portion of your assets to cash will reduce your risk. Your risk will fall by 23% when you allocate 30% of your portfolio to cash or short-term investments. Stocks outperform cash significantly over time; however, for the past two years, this has not been the case as stocks have fallen 4.5% from January 1, 2018.[5]

Calvin Coolidge said, “Use it up, wear it out, make it do, or do without.” Mr. Coolidge was a fan of cash, and we ought to follow his advice today. If you have the money to buy something, go for it. If not, save your money until you do.

Cash has always been king, and it should be given the respect it is due. Treat it as a valued asset, and it will bring you peace, and it may even enhance your portfolios overall performance.

I don’t get no respect – Rodney Dangerfield

May 4, 2020

 

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

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

[1] https://www.nasdaq.com/articles/its-time-for-warren-buffett-to-get-greedy-2020-03-13, Barrons, Andcrew Bary, March 13, 2020

[2] https://fortune.com/2019/02/15/apple-tim-cook-netflix/, Fortune, Don Reisinger, February 15, 2019

[3] https://gerberkawasaki.com/article/open-letter-to-tim-cook-and-elon-musk-on-why-apple-and-tesla-need-to-merge, Danilo Kawasaki, website and article accessed May 3, 2020

[4] https://www.wsj.com/articles/wells-fargo-curtails-jumbo-loans-amid-market-turmoil-11586037701, WSJ, Ben Eisen, April 4,2020

[5] YCharts

Do Investment Returns Matter?

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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

Can You Save $500 Per Month?

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Saving money shouldn’t be difficult, but it is. Trying to find a few extra nickels to save at the end of each month is a challenge, but is it possible for you to find an extra $500?

Professionals often recommend strategies to help you reduce your expenses. Some of the more popular suggestions include taking your lunch to work, clipping coupons, or drinking less coffee. These are good ideas, but I believe you can have your latte and drink it too.

One way to start saving more money is to automate your contribution and treat it like a monthly expense similar to your car or mortgage payment. You can link your bank account to your investment account and once it’s established, your savings will start to pile up.

A mutual fund is the best investment for your monthly contribution. A stock mutual fund will give you the greatest opportunity to create wealth, but it will be volatile. If you don’t like volatility, a bond fund is a conservative option. A balanced fund is a combination of the two, giving you the best of both worlds.

If you start saving $500 per month today and earn 7% on your investment, you will have $86,542 after 10 years.

If you had invested $500 per month in the Vanguard S&P 500 index fund, here is what your account would have been worth at the end of 10, 20, 30, and 40 years.[1]

The value of your account after 10 years was worth $129,457.

The value of your account after 20 years was worth $325,530.

The value of your account after 30 years was worth $968,374.

The value of your account after 40 years was worth $3.7 million.

Why is it important for you to save money monthly? In a recent report by Northwestern Mutual, they found 50% of Americans have less than $75,000 saved for retirement.[2] I don’t want you to be part of this group.

What if you can’t save $500 per month? If you can’t, save whatever you can afford. After all, saving something is better than saving nothing.

After I graduated from college, I set up an automatic investment plan with a Franklin Mutual Fund. I started saving $25 per month and after my first year I had accumulated more than $300! I was on my way to financial freedom. I have not stopped saving money monthly and it has allowed me to build a nest egg, buy a home, pay for my daughter’s education, and so on. The key to my financial success has been the monthly contributions.

Can you invest $500 per month? I believe you can.

The creation of a thousand forests is in one small acorn. ~ Ralph Waldo Emerson

9/3/2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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.

 

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

 

 

 

 

[1] Morningstar Office Hypothetical, period ending 8/31/2018.

[2] https://www.cnbc.com/2018/05/15/how-much-americans-have-saved-for-retirement.html, Emmie Martin, 5/16/2018.

How to Become a Better Investor.

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Practice makes us all better.  Vince Lombardi once said, “Practice does not make perfect. Only perfect practice makes perfect.”  Do you need to strive for perfection to become a better investor?  Of course not!  In fact, striving for investment perfection may leave you feeling down and depressed.   Rather than trying for perfection aim for small victories to improve your lot.

Here are a few ideas to help you become a better investor.

  • Plan. Investors who complete a financial plan have three times more assets when compared to those individuals who don’t do any planning?[1]  A financial plan will help guide you towards your financial goals and keep you grounded when the stock market goes haywire.
  • Budget. A strong budget will improve your investment results.  If you can get a handle on your spending habits, then you can start to improve your financial picture.  The best way to budget is to comb through your previous bank and credit card statements.   Your review will identify the good, bad and ugly of your spending habits.   Mint.com is a great resource to help you with your budgeting.
  • Save. Saving your own money is paramount to long-term financial success.  How much should you save?  I’d recommend 10% of your gross income to start.  If you earn $10,000 per month, then try and save $1,000 per month.  If you can’t save 10%, then save what you can because something is better than nothing.
  • Automate. Establish an automatic deduction from your checking to your savings account or investment account.   By automating your savings you’re more likely to stay committed to your investment program thus giving you an opportunity to increase your long-term wealth.
  • Look to the Horizon. Knowing your investment timeframe will improve your results.  If your time horizon is 1 to 3 years, investment in safe, short-term investments like CD’s or T-Bills.   If your time horizon is 3 to 10 years, buy bonds and stocks.  A time horizon of 10 years or more calls for a large allocation to common stocks.
  • Participate. If your company offers a 401(k) plan or similar program, sign up as soon as possible.  Again, the recommended savings amount is 10%, however, if you can’t contribute this amount then find out what the company match is and start with the match percentage. For example, if your company matches 4%, you should contribute 4%.
  • Buy Stocks. Stocks outperform bonds.  The 90-year average annual return for common stocks has been 10% while long-term government bonds returned 5.6%.   A one-dollar investment in large company stocks is now worth $5,386 while a dollar invested in bonds is worth $132.[2]   A heavy dose of common stocks will give you the best opportunity to create generational wealth.
  • Buy Small Stocks. Small company stocks outperform large company stocks.  The Dimensional U.S. Small Cap Value Index averaged 13.3% from 1928 to 2015.   A one-dollar investment is now worth $58,263.   The Dimensional Large Cap Value Index averaged 11.1%.   A dollar investment in the large cap index is now worth $10,414.[3]
  • Buy Index Funds. Passive index investing is better than active stock picking. The Standard & Poor’s study of passive v. active reveals that over 15-year period 95% of active fund managers fail to outperform their benchmark.   This is also the case for 1, 3, 5 and 10 years.[4]
  • Diversify. Diversification is safer than concentration.  A diversified portfolio of large, small and international companies allows you to own stocks from around the globe.   Adding bonds and cash to your portfolio will reduce your risk.   Moving to a 60% stock and 40% bond portfolio from an all stock portfolio reduces your risk by 24%.   Allocating your assets across sectors, investment types, and continents can increase your odds of investment success.
  • Practice Patience. It takes time to create generational wealth.  Don’t worry about the daily moves in the stock market and don’t try to trade your way to financial freedom.  A solid buy and hold strategy is the best way for you to make money.  In fact, missing a few of the best days in the stock market can derail your investment program.  A study by J.P. Morgan found investors who missed the 30 best days in the stock market saw their investment return drop by 85%![5]
  • Rebalance. Rebalancing your account will allow you to keep your risk level intact.  For example, if you start the year with 60% stocks and 40% but end the year with 80% stock and 20% bonds you now have too much risk.  An annual rebalancing of your account back to 60%/40% is the prudent way to manage risk.  I’d recommend rebalancing your account in January to make sure you’ve received all your dividends, interest payments and capital gains.
  • Lower Your Fees. Lower fees are better than higher fees. The less you pay in fees the higher your return.   This is obvious but needs to be stated.  Less is more.  If you’re not sure what fees you’re paying, ask.  You can also look up your mutual fund fees on sites like Morningstar or Yahoo! Finance.
  • Get Help. Working with an investment advisor can help you increase returns. A study by Vanguard showed working with an advisor can add 3% in net returns.[6]   An advisor will help you with financial planning, estate planning, investment planning, charitable planning, and much more.  If you’re going to work with an advisor, make sure they’re a Certified Financial Planner™ or Chartered Financial Analysis.

With these suggestions, I’m confident you’ll become a better investor.   A little practice and patience will take you a long way on your road to financial success.

The journey of a thousand miles begins with one step. ~ Lao Tzu

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

September 23, 2017

Note: Your investment results may differ than those posted in this blog. Past performance is not a guarantee of future results.

[1] http://www.nber.org/papers/w17078.pdf

[2] Dimensional Funds 2016 Matrix Book.

[3] Ibid.

[4] https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

[5] http://www.businessinsider.com/cost-of-missing-10-best-days-in-sp-500-2015-3, Sam Ro, 3/12/2015

[6] https://www.vanguard.com/pdf/ISGQVAA.pdf