A Few Things I Know

Most markets have struggled during the months of October and November causing angst and worry among investors. Media commentators, reporters, and online personalities are bellowing from their pulpits about the pending doom in the markets and economy. If these experts were asked to help contain a fire, they’d bring kerosene. It’s easy to focus on negative items especially when investments are losing ground. Misery loves company.

Rather than focusing on the unknown and worrying about tomorrow, spend time identifying things you know and can control. With that said, here a few things I know and one I don’t.

The things I know:

  • Individuals who complete a financial plan have three times the assets of those individuals who do little or no planning.[1]
  • Stocks outperform bonds. The 91-year average annual return for common stocks has been 10.2% while long-term government bonds returned 5.5%. A $1 investment in large company stocks is now worth $7,347 while $1 invested in bonds is worth $143.[2] 
  • Small company stocks outperform large company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.4% from 1928 to 2017. A $1 investment is now worth $83,387.  The Dimensional Large Cap Value Index averaged 11.3%. A $1 investment in this large cap index is now worth $15,699.[3]
  • Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% is attributed to market timing and investment selection.[4]
  • Passive index investing is better than active stock picking. The Standard & Poor’s study of passive v. active reveals that over a 15-year period 95% of active fund managers fail to outperform their benchmark. This is also the case for 1, 3, 5 and 10 years.[5]
  • Lower fees are better than higher fees. Less is more.
  • Working with an investment advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[6] An advisor can help with financial planning, estate planning, investment planning, charitable planning, and much more. 
  • Stocks fluctuate. But the S&P 500 has made money 73% of the time dating back to 1926.
  • Risk and reward are linked.
  • A buy and hold model of low-cost mutual funds is difficult to beat over time regardless of market conditions.
  • Spending less money than you earn will help you create generational wealth.
  • A high debt level will suffocate your ability to save money and enjoy life.
  • Giving money to those in need makes economic and spiritual sense. It will also make you happier.
  • Health is wealth. Take care of yourself.

One thing I don’t know:

  • The future.

In a few weeks we’ll roll into a new year. As we approach 2019, focus on those things you can control like saving, spending and expenses. Think long-term. Create a financial plan. Set some goals. Dream big. Smile always. Enjoy life.

 “No! Marty! We’ve already agreed that having information about the future can be extremely dangerous. Even if your intentions are good, it can backfire drastically!” ~ Dr. Emmett Brown (Back to the Future)

November 21, 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.

 

 

 

[2] Dimensional Funds 2016 Matrix Book.

[3] Ibid.

[4] 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.

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