What is financial planning? According to the Certified Financial Planner’s Board, it involves looking at a client’s entire financial picture and advising them on how to achieve their short- and long-term financial goals.[1] A comprehensive plan can help you make informed decisions about your future, giving you a baseline and roadmap based on your goals. It’s a living document that constantly changes and reacts to your needs and market conditions, and it is an invaluable tool.
A well-constructed financial plan encompasses your whole financial picture, touching on such topics as retirement, estate, education, investment management, budgeting, insurance, taxes, and giving. In addition to finances, a good planner addresses the emotional and psychological side of planning. It’s a two-piece puzzle – financial and emotional.
Here is a look at a few of the critical financial planning areas:
Retirement. Retirement is a primary goal for most of our clients. An analysis of your current assets, savings, spending, and goals will determine your retirement date and asset level.
Estate. Estate planning is essential for your loved ones, and a good one can ensure your assets are in your beneficiary’s hands, not the government’s. A valid will or trust is paramount to protect your resources, and the appropriate beneficiary designations on your investment accounts, retirement plans, and insurance policies are required.
Education. Do you have young children? If so, a 529 education account is an excellent way to save for college. The assets inside a 529 plan grow tax-free if used to pay for tuition, room, board, books, etc. Why save for college? The current annual tuition for a public college is $27,330.[2]
Investment Management. Prudently investing your money to achieve your goals requires skill, patience, and wisdom, especially in down markets. It’s vital to your success. Are your assets appropriately diversified and in line with your risk tolerance? Investing is not speculating, so don’t gamble your assets on risky investments that could derail your plans.
Budgeting. Do you know where your money is going? Budgeting provides valuable information on how you spend your dollars. A deep dive into your spending habits can free up assets for saving and investing. Also, a budget allows you to spend money without shame or guilt.
Insurance. An insurance policy can protect your family and possessions. Insurance premiums are expensive but necessary, and it’s foolish to plan for your future without proper coverage. Buying term insurance is acceptable; avoid whole-life policies or Maximum Premium Indexing contracts (MPI). And, yes, a non-working spouse should purchase life insurance too.
Taxes. Tax planning allows you to make tax-efficient decisions, especially when receiving funds from your investment and retirement accounts. It also ensures you’re making wise decisions about deductions and credits.
Giving. Philanthropic planning benefits your bottom line and helps those in need. A gift-giving program can help charities by correctly using donor-advised funds (DAF) or charitable remainder trusts (CRT). You can also give away $17,000 yearly to your loved ones without tax or estate issues.
Emotions. Are you ready to retire? What will you do, and how will you spend your time? Do you have hobbies? Are you prepared to donate your assets to charities or loved ones? Are you comfortable living without a paycheck? Will you move to a new state or country when you retire? Managing your emotions is just as important as managing your finances.
If you’re looking to hire a financial planner, ensure they are certified by the CFP Board. A Certified Financial Planner Participant has passed a rigorous test and years of study to obtain the valuable and powerful CFP® designation. In addition to the initial requirements, CFP® professionals must get thirty hours of continuing education credits every two years.
According to the CFP Board, 90% of consumers value an advisor’s credentials, and 86% prefer one who passed a certification exam and rigorous education program.[3] Once individuals obtain the CFP® designation, they’re now fiduciaries, required to act in your best interest. However, be warned of false prophets, especially on Tik Tok. I’ve seen several posts from financial coaches, insurance sales representatives, and influencers masquerading as financial planners. Before you commit to an advisor, check their credentials. Here is a link to find a CFP® professional in your neighborhood: https://www.letsmakeaplan.org/
Good luck and happy planning.
Let our advance worrying become advance thinking and planning. ~ Winston Churchill
February 10, 2023
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 your asset level.
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.
It’s the start of a new year, and investors want answers, especially regarding the stock market and the economy. They want to know how the market will perform this year or if a recession materializes. Market experts, analysts, economists, and media personalities try to predict market moves and the economy’s direction. Yet, it’s a giant guessing game because no one can forecast the future, yet everybody tries to do it.
Last year, twenty-four market analysts predicted the S&P 500 would close at 4,904 in 2022.[1] How did they do? The index closed at 3,389, falling 19.44%, and they missed their target by thirty percent! Despite not knowing the future, the stock market has left several clues about the future of stock prices, and here is what I know.
Stocks Outperform Bonds
Since 1926, the S&P 500 has trounced long-term bonds by a wide margin. A dollar invested in stocks is now worth $11,526, but that same dollar invested in bonds is worth only $130, and one dollar invested in T-Bills barely grew to $22. Over the past decade, the S&P 500 is up 170%, while Vanguard’s Total Bond Market Fund is down 11.3%. It’s impossible to predict the daily or yearly direction of the stock market. Still, over time, it has increased significantly, and you can create generational wealth if you stay invested in stocks and commit to long-term investing.
Small Caps Outperform Large Caps
Good things come in small packages, and this is true for investments. Since 1927, The Dimensional US Small Cap Index has bettered the S&P 500 index. A $1 investment in Dimensional’s Small Cap index is now worth $50,435, while the S&P 500 index value is $10,327. The valuation of the small-cap index has been five times greater than large caps over the past 95 years. The iShares S&P 600 index has been up 529% for the past twenty years, whereas the iShares S&P 500 index is up 362%. Though small-caps have been more volatile than large companies, they produced superior returns.
Diversification Wins
As the saying goes, the only free lunch on Wall Street is diversification. It’s typical for last year’s winners to be this year’s losers. In 2017, international small-cap stocks were the best-performing sector, soaring 32.7%, but a year later, they finished in last place, falling 17.63%, while short-term bonds were the best asset class in 2018; they were the worst in 2019. Large-cap stocks rose 28.7% in 2021 but fell 18.1% in 2022. Emerging markets lost 17.99% in 2022 but are up 10.77% this year. However, a globally diversified portfolio of stocks and bonds stayed in the middle of all asset class returns, never the best nor the worst. Asset allocation accounts for 93.6% of your investment return, and the remaining 6.4% comes from market timing and investment selection.[2]
Now What?
I don’t know what will happen with the market or the economy this year, but your portfolio can grow, over time, if you own stocks in a globally diversified portfolio. Rather than worrying about the direction of markets, interest rates, or the economy, focus on things you can control, like spending and savings.
Forecasts create the mirage that the future is knowable. ~ Peter Bernstein
January 29, 2023
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 your asset level.
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.
[2] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.
Have you been wondering if you should have buried your money in the backyard or stuffed it under the mattress? After all, as you review the year and the performance of our recommendations, it seems evident that stocks and bonds would fall. In 2022, we experienced rising interest rates, inflation, the war in Ukraine, and China’s COVID woes, yet, with those same headwinds and thousands more, the S&P 500 produced an average annual return of 10.12% since 1926, turning $1,000 into $11.5 million. I have the utmost confidence in our models, investments, and financial plans because I have seen them work for over three decades, and I know they will perform well in the future. I’ve learned from more than thirty years in the business that clients who diversify their assets, invest regularly, follow their plans, and remain patient will reap benefits.
The Tortoise and the Hare
Warren Buffett, the CEO of Berkshire Hathaway, is the most successful investor of our generation, with a net worth of $107.6 billion, and his stock currently trades at $468,711 per share and finished last year up 4%. Despite his staggering net worth and stock market performance, he has experienced many down years since 1965. His stock fell 48% in 1974, 23% in 1990, and 32% in 2008. It also fell 30% during COVID and dropped more than 50% in the Great Recession, and from 2007 to 2013, it lost 4.3% per year. If investors panicked and sold the stock over the past thirty years, they would have missed returns of nearly 4,000%. Mr. Buffett believes in patience and said, “Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.” He prefers companies with earnings, revenues, cash flows, and dividends – a slow and steady model that we try to emulate.
In contrast, Cathie Woods ARK Innovation fund trades daily and is highly active. The fund owns growth companies that may pay off in the future, like Roku, Robinhood, and Coinbase. During the peak of COVID, her fund soared 152% and, at one point, outperformed Warren Buffett and Berkshire Hathaway by 200%! However, her fund hit a brick wall last year, losing 67%, as investors shifted their focus to companies with solid balance sheets. As a result, Berkshire Hathaway has outperformed ARK by 80% since the crazy days of COVID. The tortoise wins again!
Indices
The S&P 500, Dow Jones, and NASDAQ suffered terrible losses last year, falling 8.78%, 19.44%, and 33.10%, respectively. What’s interesting about the S&P 500 is that it peaked on January 3, 2022, and fell 12.4% from January to March before the Federal Reserve started raising interest rates. Since the middle of June, it climbed by 2.24%, so most of the damage occurred in the first two and a half months, and five days accounted for 100% of the losses – April 29, May 5, May 18, June 13, and September 13.
As a comparison, the Vanguard Balanced Fund, a low-cost index fund, fell 16.87% last year, and I tracked an unmanaged group of twenty indices, and they fell, on average, 16.5%. There was no place to hide in 2022, but when stocks have dropped by 20% or more since 1957, they returned 29% the following year.
Regardless of the poor performance last year, the indices have performed admirably over the past thirty years. Despite crashes, inflation, rising interest rates, recessions, wars, and pandemics, the Dow Jones soared 1,944%, the NASDAQ jumped 1,845%, and the S&P 500 climbed 1,484%. The average annual return for the big three has been 10.21%. A $100,000 investment in January 1993 is now worth $1.85 million. And, since 1993, stocks have risen 87% of the time. Again, patience rewards successful investors.
Bonds
Bonds produced their worst year ever as the Federal Reserve raised interest rates to try and combat inflation. The yield on the one-month US T-Bill soared 8,140%, rising from 0.00% to 4.12%, and when interest rates rise, bond prices fall. The iShares 20+ Year Treasury Bond Fund ETF (TLT) crashed by 31.24% last year, losing almost as much as the NASDAQ. For the past fifty years, long-term government bonds have averaged 7.20%.
Bonds could be one of the best-performing asset classes this year if the Federal Reserve lowers interest rates. In 1994, the Federal Reserve raised interest rates by 100%, only to start reducing them in 1995. In 1995, long-term bonds soared by 31.7%.
Despite the carnage in the bond market, it now benefits us because we can offer investments yielding 3%, 4%, 5%, or more, and some of the rates are guaranteed. We have not had the luxury of higher rates for some time. For example, the last time the one-month US T-Bill yielded more than 4% was in 2007.
Stay the Course
Few people like advice that says, “Stay the course.” It’s boring, and people hate it, especially when stocks fall. Doing nothing is challenging; it’s hard, and it feels like a cop-out. When stocks fall, clients want action; they want to rearrange the deck chairs and take control of the situation, but it could do more harm than good and could put your financial future at risk.
We recommend a buy-and-hold strategy when managing money which is easy when stocks rise but tough when they fall. It’s a prudent recommendation because stocks rise about three-quarters of the time, and no one can time the market.
When we recommend staying the course, we review multiple components like your financial plan, asset allocation, cash flow needs, and Riskalyze report. We do not make the recommendation lightly. If the data gives us a positive reading, we do not make any changes to your portfolio; if your goals change, we will adjust your plan and investment program accordingly.
Financial Planning
Since I started the firm seven years ago, we have completed more than one hundred and forty financial plans, covering $300 million in assets.
The top five retirement goals are travel, purchasing a new car, home improvement, buying a new home, and celebrations (weddings, anniversaries, etc.).
The most popular expectations for retirees are pursuing an active lifestyle, spending time with friends and family, and living less stressfully. However, don’t wait until you retire to enjoy your life.
The two most common retirement concerns are running out of money and suffering investment losses. Running out of money in retirement is not good, and we want to ensure clients can retire on their terms and, more importantly, stay retired. Running out of money and suffering investment losses are competing concerns, and you must choose between risk now or later. If your investments are too conservative early in your career, you may run the risk of running out of money. If your assets are too aggressive later in life, suffering a significant investment loss can have dire consequences. A financial plan will assist you in selecting the proper balance between risk and reward.
Last year, our clients with financial plans were calm and more confident about their financial future and did not panic. If you want to join this impressive group, give us a call to complete your financial plan.
Recession
Will there be a recession? According to media outlets, pundits, and influencers, the answer is yes. However, the consensus on Wall Street is mixed, and we won’t know if one occurred until long after it has passed. Countless analysts are trying to read the tea leaves and signals from the stock and bond markets to forecast the recession, and, as Paul Samuelson said, “The stock market has predicted nine of the past five recessions.”
The projected global growth for 2023 is 1.8%, and so long as unemployment remains low, job openings stay high, and wages rise, it will be challenging to enter a recession. Still, if the Federal Reserve continues to raise interest rates, we could face a mild recession. Since 1945 we have experienced thirteen recessions, lasting, on average, ten months. If we enter a recession, the Federal Reserve will lower interest rates, which is positive for stocks and bonds.
Cash
The one-month US Treasury Bill is a proxy for cash and is considered the safest investment in the world. It currently yields 4.1%, above its 96-year average annual return of 3%. The S&P 500 closed down 19.4% last year, so a positive 4% return looks appealing.
Cash is a short-term haven if you need liquidity or safety, but it’s a poor investment. The current inflation rate is 7.11%, and the dollar will lose more than half its value over ten years; at the historical inflation rate of 3.25%, the dollar loses 60% of its purchasing power over thirty years. The S&P 500 has risen 1,484% over the past thirty years, averaging 9.65%. Cash always loses the inflation battle, but stocks offer a hedge.
Another negative for cash is that it never grows. Stocks are volatile but allow you to recoup your losses over time; cash won’t. Once you sell stocks to buy T-Bills, you never recover your losses. For example, if you bought the S&P 500 Index in January 2007, you lost more than half your investment (56%) by March 2009. If you panicked and sold, you never recouped your original investment, but if you remained invested through the end of 2022, you could have earned 274%, turning $10,000 into $37,410. In addition to the Great Recession, stocks fell 20% in 2018, lost 30% during COVID, and dropped 20% last year. Even though the market suffered four significant corrections in fifteen years, it almost tripled. The one-month T-Bill returned 0.84% per year before taxes and inflation during the same time frame.
ESG
Environmental, social, and corporate governance (ESG) remain hot topics for investors. Through Morningstar, we can offer direct indexing allowing you to avoid investing in particular companies or industries that do not align with your beliefs. Also, if you work for a company like Apple, we can exclude it from your portfolio, so you’re not adding to your concentrated position. The minimum investment for this service is $250,000.
Expectations
How will the stock market perform in 2023? I don’t have a clue, but I like what JP Morgan said, “It will fluctuate.” Over the past thirty years, the S&P 500 has averaged 9.65% per year, turning $10,000 into $158,400, and was positive 80% of the time. The index experienced consecutive negative years once – from 2000 to 2002. The best one-year stretch occurred from April 2020 to March 2021, when it jumped 56%. The worst one-year period happened from March 2008 to February 2009, when the index dropped 43%.
Inflation has probably peaked, and interest rates should stabilize, benefiting stocks and bonds. A weaker dollar will boost international investments, while lower inflation and interest rates could spell trouble for commodities like gold and silver.
Cash remains attractive for short-term needs. The one-month US T-Bill currently yields 4.25%, significantly higher than rates available from money-center banks like Wells Fargo or Bank of America. The interest rates on US Treasuries could remain at these levels for the foreseeable future.
We continue to shun Bitcoin and other cryptocurrencies and avoid them at all costs. It’s an asset class that continues to fail on several fronts.
Janet Jackson
Janet continues to support our firm with excellence by working directly with our clients helping them open accounts, transfer funds, or handle the required minimum distribution. In addition, she is leading our efforts to join the Schwab platform. Though the merger won’t close until Labor Day, we joined Schwab early through a pilot program, and she has been instrumental in our smooth transition.
Spencer Engelke
Spencer has been a fantastic addition to our team this past year, and he handles most of our financial planning duties and directs our weekly podcasts. He continues to flourish at PWM, and his future is bright.
He completed his coursework for the Certified Financial Planner® designation and will sit for the exam in July.
Starbucks
Our firm continues to grow; we now work with more than 160 households across fourteen states. As a result, our Starbucks growth indicator remains strong, as we increased our card mailing this year by 11%.
Thank You
I know it was a challenging year, and my heart aches for your pain, but markets always recover. We appreciate your loyalty, faith, and trust in our firm.
Sincerely,
Bill Parrott
Bill Parrott
President and CEO
Parrott Wealth Management
Austin, TX
January 7, 2023
Rejoice in hope, be patient in tribulation, be constant in prayer.
~ Romans 12:12
Note: The Financial data is from YCHARTS, TD Ameritrade, Dimensional Funds, and Yahoo! Finance. Past performance does not guarantee future performance,
Goodbye, 2022, and good riddance. Don’t let the door hit you on the way out. What a brutal year for investors, as most asset classes lost money. In hindsight, I should have buried my money in the backyard or stuffed it under my mattress.
The S&P 500 is having its worst year since 2008. and long-term government bonds have dropped 25.5%, the worst year since 1926 and probably ever. Ever! The stock market posted stellar returns in 2021, rising 26.8%, and soared 72% since 2019. The momentum was on our side until the Federal Reserve raised interest rates by 1,700%. And who wanted to buy a T-Bill yielding 0.06%, which it did in January?
The Federal Reserve is trying to kill inflation by raising interest rates from .25% to 4.25%. The inflation rate is 7.11% after peaking at 8.58% in June. It is falling but still high, and the Federal Reserve will continue to battle the silent economic killer.
Consumer sentiment remains low, and investors are depressed. The US Index of Consumer Sentiment peaked on January 1 and has dropped consistently since the beginning of the year. The current index reading is 59.10, near the lows dating back to 1952, and it has averaged 85.8 for the past 70 years. It peaked at 112 in February 2000 before the S&P 500 fell 43%. You must be excited with the current number if you’re a contrarian or perpetual optimist.
Investors are bearish according to the recent US Investor Sentiment Percentage Bullish reading of 24.3%. 75.7% of investors are negative and expect stocks to fall further, and 24.3% are hopeful they will rise. Last April, the index peaked near 60% as most investors were optimistic about the future direction of stocks. Investors now expect markets to fall more, with little hope for the future. However, a low reading is bullish for stocks.
Cash is attractive relative to falling stocks and bonds, and it’s now possible to buy a one-month US T-Bill yielding 3.8%. Investors love T-Bills because they’re guaranteed and don’t lose money if held to maturity, and they provide relief to weary investors in the near term, but they’re no match for stocks in the long run. Since 1926, T-Bills averaged 3.24%, and stocks produced an annual gain of 10.2%. A dollar invested in T-Bills is now worth $21.97; for stocks, it’s $12,231. Inflation averaged 2.95%, so your net return on T-Bills was 0.29% before taxes. Cash is a short-term gain but causes long-term pain.[1]
I’m excited for 2023 because I believe in free markets and love owning great American companies. I’m also an optimist fond of diversification, asset allocation, and financial planning. And hope springs eternal.
Merry Christmas and Happy New Year! May God’s light shine brightly on you and your loved ones.
What a wonderful thought it is that some of the best days of our lives haven’t even happened yet. ~ Anne Frank
December 15, 2022
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.
[1] Dimensional Fund Advisors Returns Web Tool from January 1926 to November 2022.
Are you struggling to find the perfect gift for your loved ones? Are you having trouble buying something for the person who has everything? Do your loved ones need another pair of socks, matching pajamas, or decorative hand towels? It can be challenging to buy gifts for others, so here are a few last-minute ideas.
Cash. You can give away $16,000 per person without impacting your estate and gift tax exclusion, and it is not limited to family members. If you’re inclined, you can gift $16,000 to friends, neighbors, co-workers, and strangers.
Appreciated Securities. If you still own an appreciated security or two, consider donating it to your favorite charity. The charity receives your stock, and you receive a tax deduction. More importantly, you won’t pay a capital gains tax when you donate your shares, nor does the charity.
Donor Advised Fund (DAF). If you’re unsure where to donate your dollars, consider establishing a donor-advised fund and giving your money away later. You’ll receive a tax deduction when you contribute money to your fund, but you don’t have to distribute the funds immediately. For example, if you contribute $100,000 to a DAF today, you can give away smaller amounts over the coming years to multiple charities. Here is a link to Schwab’s Charitable Fund: https://www.schwabcharitable.org/donor-advised-funds
Qualified Charitable Distribution (QCD). If you’re 70 ½ or older, you can distribute up to $100,000 from your IRA to charitable organizations. In addition to supporting a nonprofit, the distribution fulfills your annual required minimum distribution (RMD). You won’t receive a tax deduction for your gift and won’t pay taxes on the distribution. It’s a win-win.
Charitable Remainder Trust (CRT). A CRT is similar to a donor-advised fund, except you’ll receive income from your gift and the charity receives your remaining assets at your death. For example, if you donate $1 million to a CRT, you may receive annual income in the range of $50,000 to $80,000, and when you pass, the remaining assets are sent to the organization you selected.
529 Education Plan. The gift of education is priceless. If you have grandchildren or great-grandchildren, consider establishing a 529 education plan. The money grows tax-free if you use the funds for education expenses. A 529 plan can pay for tuition at multiple levels, including K through 12, college, trade, graduate, law, or med school.
Fruitcake. It’s an excellent gift, and it will never expire!
It’s the gift-giving season. If you have ample resources, consider helping those in need or supporting the next generation. Your gift will spread joy and cheer for years to come.
Each one must give as he has decided in his heart, not reluctantly or under compulsion, for God loves a cheerful giver. ~ 2 Corinthians 9:7
November 21, 2022
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.
The market turmoil and volatility are causing heartache for investors, and rightfully so, especially those in retirement. Losing a paycheck after a lifetime of employment is terrifying, but not having a steady paycheck in a down market is even worse. However, we can’t control the market, but we can control our spending, and Americans love to spend money.
Spending is a crucial ingredient for a successful retirement. Once your assets can cover your annual spending, you can retire, regardless of age. Most people rely on Social Security and personal investments to meet their needs, and a few will benefit from a pension plan. Social Security payments and pension benefits offer fixed payouts, unlike variable consumer spending.
We offer financial planning to help individuals better plan for their golden years, and annual spending is a number we need to complete the process. Yet, few can provide an adequate number because they don’t track their expenses, and it is the one variable required to answer the question about retirement. If you tell me how much money you spend, I can tell you if you’re ready to retire.
By now, you have probably heard of the 4% rule. I won’t delve into the research, but the study found that you should not run out of money if you withdraw 4% of your assets each year. The good news is that now you can buy a 30-Year United States Treasury Bond yielding 4%. So, if you retire today, you can guarantee a 30-year fixed payout of 4%! If your account balance is $1 million, you can lock in an annual payment of $40,000. If your annual expenses are $100,000, you need $2.5 million in assets. The math is simple: Multiply your expenses by 25 to arrive at your asset level.
Your Expenses: $_________________
Multiply your expenses by 25 to arrive at your required asset level.
Assets Needed: $_________________
If your assets are sufficient to cover your expenses, you can retire. Congratulations! If not, you need to reduce your spending or increase your assets.
How long will your assets last? Another beneficial calculation is to divide your assets by your expenses to see how long your money will last. For example, if your assets are $1 million, and you spend $100,000 per year, your money will last ten years. If you reduce your spending to $50,000, it can last for twenty years. This practical calculation will shine a light on your financial situation.
Your Assets: $___________________
Your Expenses: $________________
Divide your assets by your expenses.
Asset longevity (Years): __________
Spending is the primary level, but what if you don’t want to reduce your expenses? What if you love your lifestyle and don’t want to cut anything from your budget? You need to increase your revenue if you don’t want to reduce your spending. Can you work part-time, drive an Uber, teach a class, or turn a hobby into a career? Another strategy is to turn non-income-producing assets like commodities or cryptocurrencies into cash-flow-generating investments.
The stock market will recover, the economy will rebound, and geo-political tension will ease, but your expenses will last forever.
Too many people spend money they haven’t earned to buy things they don’t want, to impress people they don’t like. ~ Will Rogers
November 12, 2022
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.
Cryptocurrency exchange FTX is imploding and needs to raise money, and it has halted customer withdrawals as it explores its options.[1] FTX sponsors the Miami Heat Arena and Major League Baseball, endorsed by Tom Brady, Gisele Bundchen, Steph Curry, and Shohei Ohtani. Its bright light attracted speculators like moths to a flame.
It appears that FTX commingled client funds with their trading firm, Alameda Research – a major no-no for US-regulated firms.[2] FTX is Bahamas based, out of reach of US regulators, and it’s unclear how investors will get their money back since most cryptocurrencies are not regulated.
The concern over FTX has dealt a blow to cryptocurrencies, exchanges, and institutional investors. Coinbase is down 82% this year, Bitcoin and Ethereum have fallen 58%r, the ProShares Bitcoin Strategy ETF has dropped 67%, and the Grayscale Bitcoin Trust has lost 74%. Sequoia Capital is writing down their investment in FTX to zero, a loss of $150 million, and Binance, another crypto exchange, will not rescue FTX and has backed away from discussions.
I don’t want to solely pick on cryptocurrencies because traditional assets like stocks and bonds are down significantly this year. The Nasdaq is down 31%, long-term bonds have dropped 34%, and all asset classes are struggling.
Risk arrives quickly and without warning, quickly wiping out years of gains. You can’t avoid danger if you own growth assets like stocks, real estate, or digital assets. To obtain higher returns, you need to risk capital. However, you can do some things to minimize your losses.
The first rule of risk management is not to invest more money than you can afford to lose. Do not speculate with safe funds.
If it is too good to be true, it probably is. Do not chase shiny objects with promises of oversized returns hyped by celebrities.
Do not borrow money for speculation. Leverage is the best way to lose more than you intended when your investment goes south. The bank must get paid on time, regardless of how your investment is performing.
Do not speculate on the money you need in one year or less. Today, you can buy US T-Bills with a guaranteed rate of 4%.
Do not speculate with money earmarked for large purchases like a home, wedding, or college tuition.
Take calculated risks. Do your homework, read the small print, and decide. Do not let friends, influencers, or actors pressure you to invest.
If you want to speculate, limit your exposure to 3% to 5% of your investable assets. If you own $1 million in assets, your speculation budget is $30,000 to $50,000.
If you plan to invest in private placements or illiquid investments, ensure your liquid assets can cover at least five years of your living expenses.
We crave instant gratification, and few people want to grow rich slowly. We are a culture of impatience, and the thought of waiting for anything is unacceptable, but if we move too quickly, we risk missing the details. Haste makes waste.
Fortune favors the brave. ~ Matt Damon, Crytpo.com commercial
November 10, 2022
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.
I’ve worked with Patty (not her real name) for the past thirty years. She became a client when I worked for a large Wall Street firm, and in the early 1990s, we developed a rudimentary financial plan that’s still working today. Patty is now in her mid-nineties and does not worry about market corrections, drops, dips, pullbacks, or crashes, and she usually says, “We’ve seen this before, and we know the market will recover.”
Soon after completing her financial plan, she called to ask if she could afford a new car, and I told her she could buy two. Her financial plan allowed us to invest and spend courageously, regardless of economic conditions, and it still does.
Her plan has been in distribution mode from the beginning, and we have sent her more money than her account is currently worth because of the long-term trend of the stock market and the power of compounding interest. Her wisdom and foresight have kept her invested despite the generational headwinds.
A few years ago, she blessed her great-grandchildren by opening education accounts. She had more than enough money for the rest of her life, so she cracked open her nest egg to fund the accounts. Her great-grandchildren may attend college for free because of her generous gift.
Patty is strong in her faith and receives great joy from serving others with her time, talent, and treasure. She is an optimist with a positive outlook on life and does not let a bear market sour her mood.
After each portfolio review, I half-joking ask Patty if she could speak to all my clients because of her positive outlook. She won the race long ago, focuses on things she can control, and ignores the rest.
If Patty had panicked during the past three decades, she would not have the wealth she does today, nor could she have funded her great-grandchildren’s education accounts. She has been able to overcome her fear and focus on the future.
I have a hundred years of data for stocks, bonds, interest rates, inflation, etc., to try and convince clients that markets rebound, but Patty is living proof that if you follow your plan, think long-term, and have faith, things will turn out well.
If you want to succeed as an investor, follow Patty’s lead.
Someone’s sitting in the shade today because someone planted a tree a long time ago. ~ Warren Buffett
October 17, 2022
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.
Investors are limping into the fourth quarter battered and bruised from a bumpy market as stocks and bonds continue to trade lower on inflation fears and rising interest rates. Regardless of the chaos, there is still time to make smart year-end moves to shore up your finances.
Buy Stocks. Buy stocks if your time horizon is three to five years or more. The price drop allows you to purchase individual stocks and funds at lower valuations. History shows it pays to buy stocks during bear markets while others sell. If you need proof, review the previous bear markets of 1956, 1961, 1966, 1968, 1973 -1974, 2000 – 2003, 2007-2009, 2018, and 2020.
Buy Bonds. Buy bonds if your time horizon is one to three years. The one-year US T-Bill yields 4%, the highest level in fifteen years, and the rate is guaranteed!
Sell Stocks. If you own a few losers in your taxable account, sell them to realize a loss. You can offset your gains with losses, and if you don’t have any gains, you can write off $3,000 from your tax returns and roll over the loss forever until it’s gone. You can buy back stocks you sell in thirty-one days to avoid the wash sale rule. For example, if you sell Apple today, you can repurchase it on October 23.
Sell Bonds. If you purchased bonds during the COVID crisis, you have losses because the yields were considerably lower than they are now, and when interest rates rise, bond prices fall. Selling your bonds will trigger a tax loss and allow you to buy new ones with higher yields.
Required Minimum Distribution. If you’re 72 or older, it’s time for your IRA required minimum distribution. The calculation is a function of your 2021 year-end valuation and your age. If you fail to take your RMD, the IRS will assess a 50% penalty on the projected distribution amount. For example, if your RMD amount is $20,000, the IRS will penalize you $10,000, so don’t forget!
Rebalance. It’s been a volatile market this year, and your asset allocation might need an adjustment. Your asset allocation is probably too conservative as stocks have fallen. Rebalance your account to return your portfolio to your intended target.
Qualified Charitable Distribution. If you’re 70 or older, consider a qualified charitable distribution. The IRS allows you to donate up to $100,000 from your IRA to charities. Why use a QCD? The distribution qualifies as a required minimum distribution, avoids taxes, and benefits groups or organizations you support.
401(k) Contribution. The maximum contribution for 401(k) plans is $20,500 if you’re under 50 and $27,000 if you’re 50 or older.
Roth 401(k). Take advantage of your Roth 401(k). Plan participants can contribute to the Roth 401(k) regardless of income; at retirement, it can roll over to a Roth IRA.
Roth Conversion. If your IRA is down in value, consider a Roth conversion, especially if you’re still working and have significant assets in a taxable account. You can take advantage of lower stock valuations in your new Roth IRA by converting today. As stocks recover, you needn’t worry about paying taxes or the required minimum distribution again.
IRA Contribution. The maximum contribution for an IRA is $6,000 if you’re under 50 and $7,000 if you’re 50 or older. The amounts apply to both traditional and Roth IRAs. However, you can’t contribute the maximum amount to both IRAs.
Donate. The giving season is here, and non-profit organizations raise most of their funds during the fourth quarter. Donating to charities benefits you and the groups you support because they get your money, and you receive a tax write-off. Consider donating stocks or funds with significant capital gains because you can write off the security’s fair market value and avoid paying the capital gains tax.
Give. You can give away $16,000 per year under the annual exclusion, which is not a taxable event to you or your beneficiary. For example, if you’re married and have ten kids, you can give away $320,000.
Get outside. The fall is an excellent time to visit a national or state park as temperatures cool and leaves change color. Hiking in the mountains or walking on the beach is a reminder that all is well in the world.
Look deep into nature, and then you’ll understand everything better. ~ Albert Einstein
September 22, 2022
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.
Stocks, bonds, and Bitcoin are down sharply this year as inflation and interest rates soar. The Federal Reserve continues to raise short-term interest rates to try and combat inflation, and, as a result, cash is an alternative to stocks and other growth-oriented assets. Why is it time to buy T-Bills? Let’s find out.
T-Bills are the safest investment in the world, guaranteed regardless of how much you invest. If you want safety and liquidity, look no further. The current rate for a one-month T-Bill is 2.56%, and if you extend the maturity to one year, it jumps to 4%, a sharp increase from the past couple of years. The 1-Year T-Bill has ranged from a high of 8.64% to a low of zero since 1990, and the 32-year average has been 2.85%.
According to Barrons, Berkshire Hathaway, led by Warren Buffett and Charlie Munger, own more than $75 billion worth of T-Bills.[1] They use them to fund their corporate operations and make strategic acquisitions. In last year’s annual report, Mr. Buffett had this to say about cash and other short-term investments, “Charlie and I have pledged that Berkshire (along with our subsidiaries other than BNSF and BHE) will always hold more than $30 billion of cash and equivalents. We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). Both of us like to sleep soundly, and we want our creditors, insurance claimants, and you to do so as well.”
Here are a few reasons to buy T-Bills.
T-Bills are an excellent choice if you’re anxious about rising interest rates. They are auctioned weekly with maturities of 4-, 8-, 13-, 26-, or 52 weeks. It’s possible to build a short-term ladder with bills expiring weekly, and if interest rates continue to rise, you can reinvest your proceeds at higher rates without suffering a principal loss.
T-Bills can protect your account if you’re worried about a further stock market correction. Transferring 50% of your account to bonds from an all-equity portfolio can lower your risk by 37%. T-Bills are a hedge against falling stocks because they’re negatively correlated. The S&P 500 lost 8.25% in June, and T-Bills rose 0.06%, and during the initial phase of COVID, stocks fell 12.4%, and T-Bills jumped by 0.13%.[2]
T-Bills can offer you more safety than your bank if you hold a significant cash position. T-Bills are guaranteed, regardless of the amount you buy. Rather than transferring money between several banks to qualify for FDIC insurance, you can purchase T-Bills.
If you need your money in one year or less, T-Bills offer liquidity and safety not found in other investments, like stocks.
Treasury Direct (https://www.treasurydirect.gov/) is an excellent way to buy US Treasuries. After you create your account, you can participate in auctions or buy existing issues. You can also contact your advisor if you don’t want to buy them yourself.
T-Bills are bought for safety, not for growth. You must own stocks to create generational wealth and T-Bills to preserve it.
Bye, bye, and buy bonds.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” ~ Paul Samuelson
September 19, 2022
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.
