Obstacles To Wealth

Bill Parrott |

The Evergreen container ship ran aground in the Suez Canal, and it's disrupting global trade. Efforts to dislodge it from the shore have been futile, and it may be weeks before the canal is open. Meanwhile, several hundred ships are waiting to pass through the channel. Last year, 19,000 ships used the canal, representing 12% of global trade.[1] Many products are in limbo, and I sure hope we don't experience another toilet paper shortage.

The 120-mile Suez Canal was completed in 1869, connecting the Mediterranean and Red Seas. It allows ships to avoid traveling around the Cape of Good Hope, eliminating an extra 6,000 miles. The canal facilitates faster trade between Europe, Asia, and the United States.[2]

It's impossible to predict what events will impact global trade or economic conditions. I doubt anyone expected a container ship to get stuck in a canal for weeks, but here we are. The vessel will eventually move from the shore allowing ships to flow freely, so the long-term economic impact should be negligible.

Countless things can disrupt your wealth creation. Obstacles are everywhere. Here are a few things that may disrupt your financial future.

  • You hold too much cash. A significant cash position can hinder your long-term returns. If you're not using your money for a specific purpose, consider investing it in stocks or bonds. Over time, cash will lose value to inflation and taxes. A 3% inflation rate will reduce your purchasing power by 25% over ten years.
  • Your portfolio is too conservative. Allocating a high percentage of your account to cash or bonds will limit your growth. If your time horizon is three to five years or more, allocate a sizable portion to stocks, even if you're retired. A portfolio with 80% stocks and 20% bonds averaged 14.5% for the past five years. If we flip the allocation – 20% stocks and 80% bonds, it generated an average annual return of 8.19%.[3]
  • You don't have a will or trust. Investors are mainly worried about stock market corrections. No one wants to lose 10% to 20% of their portfolio, but if you don't have a proper estate plan, your heirs may have to pay 40% or more in taxes to the IRS.
  • You don't own life insurance. Life insurance is mandatory if you're a young family with kids or you carry a significant amount of debt. Life insurance is also a resourceful tool for paying estate taxes or passing on a more substantial estate to your heirs.
  • You're not saving enough. An excellent strategy for creating wealth is to save more money. It's a strategy where you have total control. The more money you invest today, means more money for you tomorrow. How much should you save? My recommendation is at least 10% of your income. My personal goal is a 10-10-10 model: give 10%, invest 10%, save 10%.
  • You're spending too much money. The opposite of not saving enough money is spending too much. You can control your spending, and the less you consume, the more you can save. The two are linked.
  • You lack diversification. A diversified portfolio can help you o avoid short-term setbacks. Last year, when stocks were falling, bonds performed well, and this year, small-cap stocks lead the way. A globally diversified portfolio of stocks, bonds, and cash is a prudent investment strategy.
  • You're too concentrated. Don't put all your eggs in one basket or all your products in one container. If 100% of your merchandise is in a container on the  Evergreen, you're in trouble. A portfolio that relies on one or two stocks does well when they're rising, but it could damage your returns when they fall. Limit your single stock exposure to 10% of your account balance.
  • You don't have a  plan. Your financial plan is your GPS, and It will help you navigate treacherous waters. Last March, during the COVID correction, we relied on our client's financial plans to remain invested. When the market rebounded, our clients profited.

It's easy for a small thing to magnify a bigger problem, and most of the time, it's not evident until after the fact. To avoid a minor issue turning into a major one, work with a Certified Financial Planner® who can help you create a plan based on your goals.

We may have all come on different ships, but we're in the same boat now. ~ Martin Luther King, Jr.

March 27, 2021

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

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