Does Age Matter?

Bloomberg recently published an article titled: The Old Rules for Building Wealth Are Obsolete. It highlights a few prominent financial advisors who target millennials. My take on the article is that older planners don’t understand younger clients. One advisor said, “Do you think someone’s going to tell some 65-year-old white dude, ‘Hey, we’re having trouble getting pregnant, can we take $20,000 out of savings?’’ She said, “They Won’t.”[1] Listening to the client, assessing their situation, and implementing their plan is universal – regardless of the age of the client or the advisor.

I was 24 when I started in the investment business. My friends and I didn’t have any money. We were concerned about paying down debt, getting married, raising kids, buying homes, and advancing our careers. We were struggling to save $50 a month, and we never talked about retirement. We had millennial-type issues.

Clients feel more comfortable working with advisors who think and act as they do, so it’s not surprising that younger clients want to work with younger advisors. My first branch manager told me clients gravitate towards advisors in whom they have much in common. My initial clients were in their 60s, 70s, and 80s primarily because I prospected with tax-free municipal bonds, a popular investment among people with assets. After obtaining a new client in his mid-80s, an “older” broker of 50+ approached me to see if I needed help. He was concerned I wouldn’t be able to handle the account because I didn’t understand the individual’s needs. I didn’t take him up on his offer.

If age is the key component for a client-advisor relationship, then boomers will work with boomers and millennials will work with millennials, and so on. Thankfully, this is not the case. Advisors most likely work with a slice of each cohort.

Unfortunately, the financial planning industry does have an age and diversity problem. It’s an industry dominated by older white males. 77% of Certified Financial Planners® are male[2] , and the average age is 50, while 11.7% of advisors are under the age of 35.[3] According to the Bureau of Labor Statistics, 86% of individuals working as a personal financial planner are white.[4]

I welcome the youth movement for the profession, maybe because I started in the business at a young age. When I talk to students, young professionals, or youth groups, I encourage them to explore the industry as a career choice. Colleges and universities have been offering degrees in financial planning for a few years. Schools like Texas Tech and Texas A&M are producing extraordinary financial planner graduates – a boon for the profession.

Next year I’ll be the president of my local financial planning association, and my mission is to expand our Women’s Initiative program and NexGen platform. Our women’s initiative is strong and robust; NextGen needs some help. I’m hopeful these two groups will flourish in our chapter for years to come. Our chapter does have a growing presence among women, minorities, and millennials. Two of our past five presidents have been African American women.

Financial planning and investment advice have always focused on relationships and trust. A good advisor will listen to a person’s needs, assess their situation, and give guidance. More importantly, they put the interest of their clients first and act in a fiduciary capacity. These old rules will never be obsolete.

Financial planning is life planning, and life is constantly changing. The young will grow old. Their wealth will increase. Their needs will change. My friends and I are much older now, and we’re concerned about retirement, helping our children launch their careers, worried about our aging parents, and giving back to our communities. The circle of life marches on; I doubt it will change soon.

Maybe I’m an old curmudgeon, but I still believe the planning and wealth management rules of yore still work today. Financial planning should be agnostic to income, age, race, gender, etc. It should be available to those who want or need help – based on trust and understanding.

Don’t let anyone look down on you because you are young, but set an example for the believers in speech, in conduct, in love, in faith, and in purity. ~ 1 Timothy 4:12

Wisdom is with the aged and understanding in length of days. ~ Job 12:12

July 25, 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 any asset or fee minimums 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] https://www.bloomberg.com/news/articles/2019-07-24/how-to-build-wealth-prepare-for-retirement-when-you-re-young, Suzanne Woolley, July 24, 2019

[2] https://www.cfp.net/news-events/research-facts-figures/cfp-professional-demographics

[3] https://retirementincomejournal.com/article/babybust-only-11-7-of-financial-advisors-are-under-35-cerulli/, Editorial Staff, March 8, 2018.

[4] https://www.carsongroup.com/insights/blog/advisors-face-a-diversity-problem/, Cameron Carlow, February 21, 2019

My Fee Is Better Than Your Fee

Advisors, brokers, planners, bloggers, vloggers, Fin Twit experts, and other pontificators are praising the benefits of their own fee models while bashing all others. Strong opinions about whose fee schedule is best is a common thread. At the end of the day, however, a fee is a fee regardless of how it’s charged.

Firms may combine fee platforms or institute pricing tiers with minimum fees. For example, advisors may bill you hourly for their financial planning services while charging you an asset management fee.

One of my clients has been hounded by a stockbroker who has been trying to sell her an annuity. He told her the purchase would not cost her anything. After some research, I found out that he was going to receive a 5% commission.

Several years ago, an insurance agent approached me about buying a whole life insurance policy with an annual premium of $100,000. I was also told I wouldn’t incur any out of pocket expenses or fees. He was going to make $55,000 if I had purchased the policy.

If a broker tells you it won’t cost anything, you’re probably going to get fleeced.

Fees are confusing, especially if they’re called something else. It’s all semantics. Here’s a guide to help you navigate the murky waters of fees. This will help you identify the various types you might incur when you’re meeting with a financial professional or reviewing your account statements.

Commissions. If you buy or sell a stock, a commission will be added to or deducted from your trade. Bonds will also trade with a commission ranging from $1 to $30 per bond. If you purchase 100 bonds ($100,000) and you’re charged $10 per bond, your fee will be $1,000. This is referred to as a markup or markdown. Exchange traded funds and options will also trade with a commission. The more your broker trades, the more commissions they’ll earn.

Front End Load. Mutual funds with a front-end load will have commission rates ranging from 1% to 5% or more and it will be deducted from your purchase. If you invest $100,000 into a fund with a 4% front-end load, your fee will be $4,000, so $96,000 will be invested. The most common type of front-end loaded mutual fund is referred to as an “A” share.

Back End Load or Deferred Sales Charge. Funds and annuities with a deferred sales charge will charge a fee if you liquidate early. A declining sales charge is applied based on the number of years you own your holding. A fund may have deferred sales charge that declines over five years where 5% is deducted the first year, 4% the second year, 3% the third year and so on. If you invest $100,000 into a fund with a deferred sales charge and you sell it in year three, the fund company will deduct 3%, or $3,000 from your proceeds. The most common share class with back end loads are “B” and “C” shares.

Wrap. A wrap account will charge a percentage based on your investment but not charge a commission for your trades because the commissions are wrapped into the fee. Wrap accounts are popular with brokerage firms. They’ll offer you an investment account that owns 50 to 70 stocks or more. Depending on the size of your investment, you may own 2 to 3 shares of a company and If you were paying commissions, the fees could climb quickly. I worked for a large brokerage firm several years ago and our wrap-fee program charged clients 3% per year – an extremely high fee.

AUM. The asset under management fee model is popular with Registered Investment Advisors. An advisor may charge you a fee of 1% on the assets they manage on your behalf. The fee drops with the more assets you have under management.

Retainer. A retainer fee model will give you access to an advisor or planner for a specific project or timeframe, but it may not include managing your assets. It’s similar to an a la carte menu at a restaurant.

Flat Fee.  Your fee is flat, or fixed, regardless of your asset level. This model favors large accounts and punishes smaller ones. Advisors will charge a flat fee for financial planning and investment management services. This fee differs from the retainer model because the relationship is intended to be long-term.

Hourly. This model works well if you want a limited scope offering or a one-time analysis like a second opinion. It also appeals to investors who want to pick their own investments but want guidance with their asset allocation or financial plan. Advisors may charge $250 to $500 per hour to create a financial plan, review your investments, or give you guidance on a special project.

Subscription. This is a relatively new model primarily aimed at millennials or high-income earners with little assets. A fee is charged based on your income or net worth and it’s billed monthly, like a car payment. Services may include budgeting, cash flow planning, debt reduction, 401(k) guidance, and investment selection.

Hedge Fund. Hedge funds typically have a 2 and 20 model. They’ll charge you 2% on your assets and receive 20% of your trading profits. For example, if you invest $1,000,000 and it grows to $2,000,000, your hedge fund will earn 2% on $2,000,000 and receive $40,000 in fees. They’ll also earn $200,000 on your trading profits.

Regardless of where or how you purchase a mutual fund, exchange traded fund or annuity, they’ll have ongoing fees and expenses. Mutual funds and ETF’s have operating expenses (OER) and the fees vary wildly. Mutual funds may also have a 12b-1 fee, charging you another .25% on top of the OER. An annuity has fees for mortality, riders, administration, and investments – to name a few. Annuity fees can climb to 3% or more. Individual stocks, bonds and options do not have ongoing fees or expenses after they’re purchased.

Fees come in all types of flavors, so pick one that works well for you and your family. If you’re concerned about fees, then open an account at T.D. Ameritrade, Fidelity, Vanguard, E*Trade, or Schwab and only buy individual stocks, bonds or low-cost index funds. The commissions and fees will be low so long as you don’t day trade your account.

Fees are important, of course, but it’s more important to work with an advisor you trust. One who puts your interest firsts and acts in a fiduciary capacity is recommended.

What about our fees? We charge .5% ($5 per $1,000) for assets under management which includes a financial plan. Our stand-alone financial planning fee is $800.  Good conversation, fellowship and bad jokes are free.

In the long run, we shape our lives, and we shape ourselves. The process never ends until we die. And the choices we make are ultimately our own responsibility. ~ Eleanor Roosevelt

June 25, 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.

 

 

 

 

 

Dry Powder

Active stock traders need to keep some dry powder so they can buy stocks when the stock market falls. Dry powder usually means cash. Allocating a portion of your portfolio to cash will be a drag on your returns, especially in a low interest rate environment with a rising stock market.

Traders need to be nimble so they can pounce on stocks when they drop. A cash hoard gives them the opportunity to act quickly without selling another position. This strategy works well when stocks fall, and they act on their impulse. If they time their purchase correctly, they can make a lot of money. Of course, if they don’t act quickly or time their purchase correctly, their strategy is for not. In a stock picker’s market cash is needed.

Traders look for fallen angels and Boeing is a classic example. Due to their unfortunate tragedies, the stock has dropped from its high of $440. Traders felt that Boeing below $400 was a bargain. The stock went through $400 like a hot knife through butter, falling another $62 to $338. Traders took their dry powder to buy it at $400 only to see their investment fall 15%.

Timing the market is extremely difficult. According to one study, asset allocation accounts for 93.6% of your investment return with the remaining 6.4% attributed to market timing and investment selection.[1]

During the fourth quarter of 2018 the Dow Jones fell 12.5% and investors withdrew $183 billion in mutual fund assets. Investors were storing up some dry powder, I guess. This year investors have added $21 billion to mutual funds, or 11.5% of what they took out last year. Meanwhile, the Dow has risen 13.8%. Dry powder?

A better strategy for most investors is to own a portfolio of low-cost index funds, diversified across asset classes, sectors and countries. This portfolio will give you exposure to thousands of securities doing different things at different times. It will allow you to stay fully invested because you never know when, where, why, or how the stock market will take off. It reduces your risk of market timing and eliminates the cash drag on your performance.

But what if, or when, the market falls? In a balanced portfolio you will own bonds of different maturities. For example, during the Great Recession stocks fell 56%. Long-term bonds were up 16.6% while intermediate bonds stayed steady at 2.94%. Dimensional Fund Advisors Five-Year Global Fixed Income fund rose 4.9%. True, they did not offset the entire drop-in stocks, but they did hold their own.

It’s possible, and recommended, to rebalance an index portfolio on a regular basis. When your asset allocation changes, rebalance your portfolio to return it to its original allocation. This strategy allows you to buy low and sell high on a regular basis. I once heard an advisor compare rebalancing to getting your haircut. When your hair gets too long, cut it back to its original length.

Shouldn’t stock pickers make money in a stock picker’s market? According to Morningstar only 24% of active equity mutual fund money managers beat their passive index over a 10-year period.[2] Is it possible to pick the top quartile funds every year for the next ten years? Doubtful.

Dimensional Fund Advisor’s found that over a 20-year period only 42% of equity funds survived. Their database started with 2,414 funds and only 1,013 survived twenty years. If more than half the funds fail, how will you be able to pick the top 25%?[3]

Rather than keeping dry powder or trying to time the market, focus on your financial goals and invest in a balanced portfolio of low-cost index funds.

Don’t let dry powder blow up your portfolio!

My mission in life is not merely to survive, but to thrive; and to do so with some passion, some compassion, some humor, and some style. ~ Maya Angelou

June 19, 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] 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.

[2] https://office.morningstar.com/research/doc/911724/U-S-Active-Passive-Barometer-7-Takeaways-from-the-2018-Report, Ben Johnson, February 7, 2019

[3] file:///C:/Users/parro/Downloads/2019%20Mutual%20Fund%20Landscape_%20Report.pdf

Latte Wars

A high-profile financial battle is brewing over coffee. Suze Orman has said that a daily coffee habit can cost you $1 million.[1] Her comments were called into question by Ben Carlson, blogger at “A Wealth of Common Sense.” He said, “This advice sounds good because the latte factor is catchy but it’s not useful advice.”[2]

Coffee, and other household items have long been at the center of the wealth debate. Financial professionals have encouraged clients to reduce their expenses by eliminating fast food, alcohol, cigarettes, donuts, etc. Reducing your expenses to improve your financial health is always recommended. However, eliminating these items from your daily routine will have a larger impact on your physical health than it will on your financial health.

Let’s ground up some numbers to find out if it makes sense to eliminate coffee from your budget.

Today, a cup of coffee costs about $2.50. If you work for forty years (25 to 65), you’d spend about $41,000 on coffee.

The average starting salary for college graduates is about $50,000. During a 40-year career they might earn $3.3 million.[3]  Their coffee habit will cost them 1.2% of their lifetime income.

How does this expense compare to other household items? According to the recent Consumer Expenditure Survey, the average household income is about $60,000. Housing is the biggest expense at 33% of income, or $19,884 per year. Food is next at 20%, followed by 15.9% for transportation. Healthcare is 8.2%. Entertainment is 5.3%.[4]

Consumers spend about 1.4% of their income on fruits and vegetables, about the same amount as they spend on coffee.  Should you eliminate fruits and vegetables from your diet to create wealth?

What if you ditched your coffee habit and invested the money in the stock market? A monthly coffee habit costs $50 ($2.50 x 20).  Investing $50 per month into Vanguard’s S&P 500 index fund (VFINX) from April 1979 to April 2019 would have grown to $1.14 million. The fund has generated an average annual return of 11.33% for the past 40 years.[5]

Of course, your numbers may differ, so here are a few ideas to help you with your spending habits.

  • Develop a budget or spending plan. Mint.com and other websites can help you improve your budgeting results. After taking stock of your revenue streams and expenses, identify items to reduce or eliminate. Look to big ticket items like housing, transportation or healthcare to make major changes to your budget.
  • Establish an emergency fund. Your emergency fund will help pay for unexpected expenses. Your fund balance should equal 3 to 6 months of your household expenses. It can be invested conservatively in a money market fund, savings account, CD, or T-Bill.
  • Invest for growth. Owning stocks for the long-haul is a great way to increase your wealth. Stocks have generated an average annual return of 10% since 1926 while U.S. T-Bills have returned 3.4%. A dollar invested in stocks is now worth $7,025. The same dollar invested in T-Bills grew to $21.[6] An investor of stocks can drink all the coffee they want!
  • Buy what you know. Peter Lynch, the former portfolio manager for the Fidelity Magellan fund, suggested investors buy what they understand. If you’re a coffee drinker, then Starbuck’s is an obvious investment choice. A $10,000 investment in Starbuck’s in June 1992 is now worth $2.6 million.[7] A quick inventory of the products in your house can be the foundation for a solid investment portfolio. Do you own any Apple products?
  • Review your spending and investment accounts. Reviewing your financial data daily, monthly, annually, or as needed is recommended to make sure you’re on the right path. At a minimum, it should be done annually.

It’s okay to spend money on things you enjoy so long as they don’t bust your budget. Living within your means is the preferred way to increase your wealth and enjoy the fruits of your labor, so drink and invest wisely!

As a note, Starbuck’s is adding a S’mores Frappuccino® this month. I’m not a coffee drinker, but I will purchase their S’mores drink because I want to and it’s in my budget!

I put instant coffee in a microwave oven and almost went back in time. ~ Steven Wright

 

May 2, 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. The investments highlighted are for informational purposes only and not recommendation to buy or sell. I’m not a coffee drinker, so my coffee expense numbers may be low.

 

 

[1] https://www.cnbc.com/2019/03/28/suze-orman-spending-money-on-coffee-is-like-throwing-1-million-down-the-drain.html, Emmie Martin, March 28, 2019.

[2] https://awealthofcommonsense.com/2019/04/the-stephen-a-smiths-of-personal-finance/, Ben Carlson, April 16, 2019

[3] https://www.cnbc.com/2019/02/15/college-grads-expect-to-earn-60000-in-their-first-job—-few-do.html, Abigail Hess, February 17, 2019

[4] https://www.bls.gov/opub/reports/consumer-expenditures/2017/home.htm, website accessed 5/2/2019.

[5] Morningstar Office Hypothetical Tool, website accessed 5/2/2019

[6] Dimensional Matrix Book 2019. Historical Returns Data – US Dollars.

[7] Morningstar Office Hypothetical Tool, website accessed 5/2/2019

Rates Have Risen

When interest rates start to rise, stocks will fall. Not only will they fall but our economy will tumble into a recession. Corporate credit will evaporate. Home ownership will cease. All dire consequences.

It’s true, rising interest rates do cause economic headwinds. But rates have been rising. In fact, they’ve risen a lot over the past couple of years.

Since July 2016, the yields on the 1-Month, 2-Year, 10-Year, and 30-Year Treasuries have risen substantially. The 1-Month T-Bill yield has risen 2,490%, the 2-Year yield has soared 384%, the 10-Year yield has climbed 135%, and the 30-Year yield has jumped 28%. Despite these rate spikes, the S&P 500 has gained 24% over the same time span.[1]

In addition to large cap stocks rising, small cap stocks have gained 30%, international stocks are up 12.56%, and emerging markets have added 10%. Not everything has risen during this two-year window. Bonds have dropped 8% and real estate investment trusts (REITs) are down 13%. An equally weighted portfolio across these six asset classes would have generated an average annual return of 9.3%.

Interest rates have been rising and falling for centuries. Below are a few substantial interest rates spikes for the yield on the 10-Year U.S. Treasury.

1983 to 1984 = 35%.

1987 = 46%.

1993 to 1994 = 57%.

1998 to 2000 = 58%.

2003 = 52%.

2008 to 2009 = 62%.

2012 to 2013 = 104%.

The average increase in yield for the 10-Year U.S. Treasury during these selected time periods was 59%. For the past 56 years the yield on the 10-Year has averaged 6.19%.[2]

If you purchased the S&P 500 in 1983, you would’ve made 1,511% – before dividends! Had you purchased stocks before any of the previous rate spikes, you’d still have significant stock gains today.

It’s hard to imagine our rates rising substantially from here, especially when other countries have much lower interest rates. When compared to other countries, our 10-year Treasury yield is substantially higher. France’s rate is .76%, Germany’s is .38%, the U.K.’s is 1.25%, and Japan’s is .09%. Australia has a comparable rate at 2.7%.[3]

Let’s look at other metrics to see if there is a case for higher interest rates.

The current unemployment rate is 3.7% which means 96.3% of Americans are working. Workers spend money – a positive for our economy.

64% of Americans own their own home. This rate has been consistent for the past 20 years.

Our current inflation rate is 2.1%, less than it was in 2008. The 91-year average for inflation has been 2.9%.

The current growth rate for the Gross Domestic Product (GDP) is 3.5%. The 71-year average GDP growth rate has been 3.2%.

West Texas Intermediate (WTI) Crude Oil is currently trading at $51.31 per barrel, down 33% from its peak in July. The average price for WTI for the past 32 years has been $43.75.

The Tax Cuts and Jobs Act lowered the corporate tax rate from 35% to 21%. Our tax rate was once the highest among developed nations, now it’s about average.[4]

Headline risk may keep a lid on the stock market in the near term, but the metrics for our economy look positive. Trying to time the stock market, or any market, based on one or two data points is futile. Anticipating the market’s direction is a loser’s game. Rather than playing the guessing game, focus on your financial goals and purchase a diversified portfolio of mutual funds so you can take advantage of the long-term trend of global markets.

Let the wise listen and add to their learning, and let the discerning get guidance. ~ Proverbs 1:5

November 23, 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] https://fred.stlouisfed.org/

[2] Ibid

[3] http://www.wsj.com/mdc/public/page/mdc_bonds.html?refresh=on

[4] https://taxfoundation.org/us-corporate-income-tax-more-competitive/, Kyle Pomerleau, 2/12/2018

Models

A few months after the Great Recession a writer for a national magazine asked a simple question: “Did asset allocation models let down the individual investor?” I don’t think they did because conservative models lost less money than aggressive ones during the meltdown. In other words, the models performed as expected.

Asset allocation models are designed to perform based on their underlying investments. They won’t guarantee your assets against market losses, but they will perform in line with their benchmarks. In a rising market aggressive models will outperform conservative ones. The opposite occurs when markets are falling.

During a market rout you may find solace by selling your investments and moving your money to cash. In the short term, it will provide safety and comfort. However, over time, holding cash is a losing proposition because your returns will be negative after you factor in taxes and inflation.

A better idea is to align a model to your risk tolerance and financial goals. If your time horizon is longer than five years, a growth-oriented model may be more fitting than an all cash strategy. You’re likely to stay invested through a market cycle if your portfolio is aligned to your beliefs giving you an opportunity to capture the returns from the long-term trend of the stock market.

How do you know which model is suitable for your situation? There are companies that provide risk tolerance software to help determine the right model for you and your family. Riskalyze and Finametrica are two firms that work with advisors to help clients determine which model is appropriate. In addition to their algorithms, a financial plan and client conversations will complete the overall asset allocation and model process.

Why should you use a model for your investment portfolio? It will give you exposure to sectors you might not have considered if you only buy individual stocks or bonds. Your model may own a dozen different mutual funds covering several asset classes and thousands of securities. You’ll gain access to international markets, real estate holdings and high yield bonds, to name a few. In addition, it’s more efficient to rebalance a globally diversified portfolio of mutual funds allowing you to keep your risk level in check.

As we approach the end of the year, it’s a good time to review your investment strategy and your holdings. Are your accounts aligned to your risk level? Are you aware of the risk in your portfolio? A portfolio review, risk analysis, fee audit, and financial plan can help you answer these important questions – and many more!

Life is a fashion show; the world is your runway.” ~ Marc Jacobs

10/31/2018

Bill Parrott 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.

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

Financial Lifestyles

The stock market has been less than kind to investors these past few weeks. The Dow Jones has dropped 3.75% and the Nasdaq has fallen about 7%. Investors have reacted negatively to rising interest rates, mid-term elections, and a trade war.

When it comes to reaching your long-term financial goals, the stock market is the least of your problems. What’s worse than a declining stock market? Your spending habits. How much money you spend and save will impact your financial future more than anything else.

If you spend less money than you make, your chances of financial independence rise dramatically. Achieving financial independence is not hard if you commit your time and resources to it. It’s easy for me to calculate how much money you’ll need to reach this pinnacle and to start moving you towards this goal.

Unfortunately, if you spend more than you make, you’ll never become financially independent because you’re leveraging your future. Debt payments and loan obligations will hinder your ability to save money and give it away.

A byproduct of living a leveraged life is stuff. Do you have a stable of items you rarely use? Is your driveway littered with vehicles collecting dust? Do you own a vacation home you seldom visit? If these items are dragging you down, sell them and pay off your loans. For example, if you own a boat, but only use it a couple times per year, sell it and rent one instead. Take an inventory of your big-ticket items to see how much you’re paying for each one and how often you use them. It makes financial and common sense to get rid of things you hardly use but constantly pay for.

Having too much debt robs you of building margin in your life. Your cash flow is a precious thing and it must be used wisely. Once you start reducing your monthly debt payments, you can start building an emergency fund. After it’s established, invest more money towards your long-term goals.

Do you monitor your spending? A tour through your bank and credit card statements will help you identify where your money is going. In addition, reviewing your paystubs and tax returns will reveal much about your financial life. Are there expenses you can reduce or eliminate?

As I mentioned, it’s easy to calculate how much money you will need to achieve financial independence, but how much do you need to be financially content? How much is enough? It’s almost impossible to put a figure on contentment, because you’ll always want more. It doesn’t matter how much you own, because someone will always have a bigger home, faster car, or nicer boat. A question I’m often asked is: “How do my assets compare to others?” Relative wealth doesn’t matter.

What can you do with your resources if you’re financially independent? Can you give it away to help others? Can you establish a foundation that will benefit a generation or two? You may find contentment in helping others.

Christian Smith and Hilary Davidson, authors of The Generosity Paradox, found: “Generosity is paradoxical. Those who give, receive back in turn. By spending ourselves for others’ well-being, we enhance our own. In letting go of some of what we own, we better secure our own lives. By giving ourselves away, we ourselves move toward greater flourishing. This is not only a philosophical or religious teaching, it is a sociological fact.”[1]

In Proverb 11:24-25 it reads: “One person gives freely, yet gains even more: another withholds unduly, but comes to poverty. A generous person will prosper; whoever refreshes others will be refreshed.”

Bill and Melinda Gates have been using their wealth to change history and save lives. They created the Bill and Melinda Gates Foundation with an initial donation that instantly made it the largest foundation in the world. The current assets of the foundation are more than $50 billion and they operate in 130 countries.[2] They have more money than they’ll ever be able to spend, so they decided to give the excess away.

You don’t need the resources of Bill and Melinda Gates to make a difference. If you manage your cash flow and spending habits correctly, you too can change lives and make a difference.

The stock market has fluctuated for centuries, so don’t worry if it’s up or down from one day to the next. Instead, live below your means, save money, help others, and good things will happen.

Keep your life free from love of money, and be content with what you have, for he has said, “I will never leave you nor forsake you.” ~ Hebrews 13:5

10/22/2018

Bill Parrott 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.

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

 

[1] http://pacificinstitute.org/pdf/The_Generosity_Paradox.pdf, The Generosity Paradox, Christian Smith and Hilary Davidson

[2] https://www.gatesfoundation.org/Who-We-Are/General-Information/Foundation-Factsheet

What Is A Mutual Fund?

Several years ago, I met with a client who was retiring from his long-time employer. He wanted to purchase a basket of stocks for growth and income. We discussed mutual funds as an alternative to owning numerous stock positions. He wasn’t aware that mutual funds could own stocks. I informed him that a mutual fund is a portal for owning stocks, bonds, or other investments. He thought he had to choose between stocks or funds. After our meeting he felt more confident owning 10 to 12 mutual funds rather than 100 to 200 individual stocks.

What is a mutual fund? It’s a professionally managed portfolio of stocks, bonds, or alternative investments. A fund may have a specific purpose or a broad mandate. A globally diversified portfolio of mutual funds will give you access to tens of thousands of investments held across several sectors. Morningstar currently tracks over 27,000 funds, so you’ll have plenty of choices for your portfolio!

Mutual funds do not trade during market hours, but the investments they own do. At the end of the trading day, a fund company will add up all the gains and losses, net out the expenses, and divide by the number of shares to arrive at the net asset value (NAV). The NAV will determine the gain or loss from the previous day. If you were to look at your account during the trading day, you’ll probably see a bunch of zeros under the daily change. After the market has been closed for a couple of hours you’ll be able to see how well your funds performed during the day.

Mutual funds distribute dividends and capital gains throughout the year. Dividends are usually paid quarterly and capital gains annually. Dividends and capital gains add to your cost basis. For example, if you invest $100,000 into a fund and it pays a $10,000 capital gain and a $2,000 dividend, then your adjusted cost basis is now $112,000. Let’s say you sell your fund for $109,000. Your realized loss would be $3,000 but your overall gain is $9,000. Make sense? You invested $100,000 and sold it for $109,000. The $12,000 in dividends and capital gains were added to your basis allowing you to take the loss.

Most people like to buy stocks they know, names that are familiar. If it’s mentioned on CNBC, it must be a stock to own – right? Regional bias may play a part in your investment decision. If you live in Houston, you may own Exxon. A mutual fund will give you exposure to companies you’ve probably never heard of or considered buying. For example, The Dimensional U.S. Small Cap portfolio own shares of Medifast. Medifast has a year-to-date gain of 213%.

Is there a downside to owning mutual funds? In a globally diversified portfolio, you’ll own a few funds underperforming the broader market. Last year the emerging market sector rose 31%, this year it’s down 9%. Mutual funds are pass-through investments, meaning they pass on the dividends and capital gains to their shareholders and this will trigger a tax bill for investments held in taxable accounts.

Mutual funds also have internal fees called operating expenses. Some funds may also charge a front-end commission of 5% or more, so if you invest $10,000, they’ll deduct $500 from your investment. Other funds have back-end sales charges if you sell your fund. If you sold your fund for $10,000, they’ll send you a check for $9,500. Other funds have 12b-1 fees of .25% which are used for marketing purposes. If you invest in mutual funds, pay attention to fees. You can control the fees you pay, so pay attention to the bottom line. For the record, I only recommend funds with low fees and no sales charges or 12b-1 expenses.

Over time, it’s hard to beat the performance of a globally diversified portfolio of mutual funds with low fees. If you have a long-term time horizon and a tranquil temperament, the long-term trend of the markets will treat you well.

and knowledge with self-control, and self-control with steadfastness, and steadfastness with godliness… ~ 2 Peter 1:6

10/19/2018

Bill Parrott 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.

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

 

 

 

Weeds

This past weekend my church participated in a serving project at a local elementary school. The school has a garden they use to teach their students about nature. It has vegetables, fruits, and a natural habitat with native Texas plants and trees.

When we arrived at the school it looked like the garden didn’t need any work. From a distance it appeared tidy. However, when we started inspecting it there were several weeds, buried walking stones, and overgrown brush. If we had not done a close inspection, we would’ve missed all the items that needed a little extra TLC. As a result, we put our gloves on and got to work.

On the surface, your investment portfolio may appear fine. It might look good from a distance, but how does it appear after a close inspection? Are there things in your portfolio that need to be pruned or added so that it performs well over time?

What items are lurking in your secret garden? Here are a few suggestions to help your portfolio sprout some new growth.

High Fees. When was the last time you had your fees audited? Do you own expensive mutual funds or insurance products that could be hindering your returns? How do you know if you’re paying high fees? If you’re not sure, talk to a Certified Financial Planner® who can help benchmark your fees to similar assets. A search of similar funds or products will give you an idea if your fees are high, low, or just right. If you do own investments with high fees, consider moving them to lower cost alternatives.

For example, the Quaker Strategic Growth Fund (QUAGX) has a front-end sales commission of 5.5% and annual expenses of 2.22%. It also has an annual turnover of 185%. It has a 10-year average annual return of 7.26%. By comparison, the Vanguard S&P 500 Index Fund (VFINX) does not have a sales commission and the annual expenses are .14%. The annual turnover for this fund is 3%. It has generated a 10-year average annual return of 11.92%, and it has outperformed the Quaker Fund by 4.66% per year. High fees will choke your portfolio of future growth.

Poor Asset Allocation. Your asset allocation will determine your portfolio’s long-term performance but if it’s inconsistent with your goals and risk tolerance, it must be changed. Your portfolio may carry too much, or not enough, risk and this will cause a problem at some point.

For example, if you were 100% invested in stocks in 2007, you lost 37% of your account balance in 2008. Likewise, if you were 100% invested in cash in 2009, you’ve missed a 340% move in the S&P 500.

Your asset allocation should reflect your goals, risk tolerance, and time horizon. If your risk tolerance is high, you’ll want to own growth-oriented assets such as stocks. If it’s low, you’ll own more conservative assets like bonds.

After your asset allocation is defined, establish an annual rebalancing for your portfolio to keep your risk profile intact. An annual rebalance is like a crop rotation.

No Financial Plan. Your plan will help prioritize and quantify your financial goals. It will guide your investment decisions over the short and long-term. More importantly, it will keep you grounded during all economic conditions. If you follow your plan, it will help you navigate the volatility in the stock market. It will also help you answer questions like: How much is enough? Your plan will be your most important tool to maximize your wealth. It will be the design of your financial garden.

As we launch into the fourth quarter of the year, use this time to review your holdings, asset allocation and financial plan. Dig deep into your portfolio and remove the weeds so your portfolio can generate fruit for years to come.

It is like a grain of mustard seed that a man took and sowed in his garden, and it grew and became a tree, and the birds of the air made nests in its branches.” ~ Luke 13:19

10/2/18

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.

 

 

 

 

Lodestar

Lodestar is the new buzzword for the year. It recently appeared in an anonymous New York Times Op-Ed article: “We may no longer have Senator McCain. But we will always have his example — a lodestar for restoring honor to public life and our national dialogue.”[1]

What is a lodestar? According to Merriam-Webster it means “a star that leads or guides; especially: North Star.” It adds, “one that serves as an inspiration, model, or guide.”

Should you follow a lodestar? In the financial services industry there are two: an advisor and a financial plan.

According to Vanguard, working with an investment advisor can help you increase returns. They found an advisor relationship can add 3% in net returns.[2]  Beyond investments, an advisor can help you with several types of planning, including financial, education, tax, estate, charitable, and much more.

In another study, it was found individuals who complete a financial plan have three times the assets of those individuals who do little or no planning.[3] Your financial plan will quantify and prioritize your goals. It will also determine your asset allocation and investment selection.

Here are a few ideas to guide you towards your financial destination:

  • Work with an advisor, preferably one who holds the Certified Financial Planner Designation. A CFP® will design a plan that is personalized for you and your family.
  • Invest your assets according to the results in your plan by utilizing a globally diversified portfolio of low-cost mutual funds.
  • Rebalance your assets annually. This will keep your investment risk and asset allocation intact.
  • Meet with your advisor to discuss your plan, goals, and assets. How often? As often as you need.
  • Adjust and amend your plan as your wants and needs change.
  • Think long term. Since 1871, investors in the U.S. stock market have always made money over 20-year periods, according to The Motley Fool.[4]

A star, map, compass, sextant, and GPS have all been used to help explorers navigate their travels. Working with an advisor and completing a financial plan can increase your odds of success of reaching your goals as both will keep you focused during good times and bad. Your advisor will use all their tools and resources to help pilot you to your financial promise land.

And behold, the star that they had seen when it rose went before them until it came to rest over the place where the child was. ~ Matthew 2:9

9/7/2018

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] https://www.nytimes.com/2018/09/05/opinion/trump-white-house-anonymous-resistance.html, Anonymous, 9/5/2018

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

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

[4] https://www.fool.com/investing/2018/05/11/ask-a-fool-what-returns-should-i-expect-from-my-st.aspx, Matthew Frankel, May 11, 2018