Month: March 2017

What’s the YTB?

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“What’s the YTB?” an elder broker bellowed from the back of the conference room.

“5%!” responded the wholesaler.

“Sweet!” answered the broker, “I will sell your fund!”

I was attending one of my first branch meetings as a newly minted broker and had never heard the term YTB.  I had heard of other yield acronyms like YTM for yield-to-maturity and YTC for yield-to-call but not YTB.

The YTB is referred to as the yield- to-broker.  The YTB is what the broker was going to earn for selling the mutual fund.   The broker didn’t care about the features or benefits of the fund; his only concern was what he was going to get paid for selling the product to his clients.

Brokerage and insurance products are sold and not bought.   Brokerage firms and insurance companies are product manufacturing machines.  Their product creativity and distribution system is without peer.  Full service investment firms and discount brokerages have a vested interest to sell you their products.  These firms may earn a commission when you buy their fund and they’ll receive an on-going fee while you own your investment.

When you purchase a product from a brokerage firm or insurance company it’s buyer beware or caveat emptor.  The product may have a front-end commission where the fee is deducted from your investment or it may have a back-end sales charge that triggers when you sell your fund.   It’s important to read the small print before you commit your capital to a new investment.

When I started my own advisory firm, I had a visit from a life insurance agent who wanted to show me one of his permanent life insurance products.  The example was a $1 million policy with an annual premium of $100,000 for ten years.  I asked him what his commission was going to be if a client invested in this policy.  He told he his first-year commission would be $55,000!  I stopped listening to his sales pitch after he told me what his fee was going to be.   We haven’t done any business together.

As you invest your hard-earned dollars take some time to ask questions about the fees you’ll be paying.  Here are few questions to get you started.

  1. How do you get paid?
  2. What is the fee or commission on this product?
  3. Is there a penalty for selling early? How early?
  4. Are there any other fees?
  5. How does this fee compare to other fees?
  6. Do you own this same investment?
  7. Does your mother own this same investment?
  8. Are there investments with lower fees?
  9. Is the fee tax deductible?
  10. Does the fee go down if I invest more money?

Keep an eye on your costs.   You can control the fees you pay when you invest.  The lower your fees, the higher your returns.

Honest scales and balances belong to the Lord; all the weights in the bag are of his making. ~ Proverbs 16:11

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

March 27, 2017

 

 

 

 

 

By the People and For the People?

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President Trump and House Speaker Paul Ryan pulled the plug on their Republican health care bill.  The same week, Chuck Schumer encouraged his fellow Democrats to filibuster Neil Gorsuch, the nominee for the U.S. Supreme Court.  Politics as usual.

Democrats and Republicans have been adversaries from March 4, 1797 when John Adams was elected as the second President of the United States.   The parties have been butting heads for 220 years and despite their best (worst) efforts our economy and stock market continue to march on.  I’m afraid their bickering and whining will carry on for another 220 years.

While watching CNBC, commentators, money managers, traders, and other experts were predicting the stock market to fall on the news the health care bill had flat lined.  The experts painted a bleak picture for Trump’s presidency because the health care bill was dead on arrival.   They opined the news doesn’t bode well for the other items on his agenda.

As far as your investments are concerned, does it matter what our elected officials pass or don’t pass?  Does it matter if they fail to reach a compromise on important issues?  Does it matter who is in the White House?  Congress?  The Senate?  The short answer is no.  In the long run, it matters little to what happens in Washington D.C.

It took our elected officials 76 years to abolish slavery, 131 years to allow women to vote, 175 years to pass the Civil Rights Bill, and 201 years to pass the American’s with Disabilities Act.  Can you imagine how much stronger our country would be if our politicians had been working for the people since 1789?

Robert Shiller has been tracking stock prices from 1871.  In 1871 the index was at 4.44 and Friday the S&P 500 closed at 2,438.98 a gain of 54,831%![1]  The invisible hand of the free market continues to rule the day.

Our elected officials are supposed to be for the people, however, if you want to stay in the know follow the titans of business.   Tim Cook, Warren Buffett, John Bogle, Fred Smith, Sheryl Sandberg, and Robert Johnson will tell you all you need to know about our economy and the state of America.   Business leaders put money in your pockets while politicians take it out.  Elected officials come and go.  When the market does fall because of what happens in D.C., use it as an opportunity to buy the dip.

Try to ignore the rhetoric and mudslinging when constructing your investment portfolio. Here are few tips you can use to put yourself in a position to win.

  1. Create your financial plan. Your financial plan will be your guide for you and your family.  Your plan will be a collection of your hopes, dreams and fears.  Your plan will guide your investments.
  2. Invest in stocks. The stock market will be your best friend over time. Investing in low cost index funds or high quality stocks should be the cornerstone of your portfolio.
  3. Automate your investing. When your investments are automated you’re less likely to stop investing due to political noise.
  4. Rebalance your investment portfolio on an annual basis. This will help reduce your risk and keep your portfolio in balance with your long-term goals.
  5. Invest early and often. The earlier you start investing the more money you’ll have in your account.
  6. Spend less than you earn. The more money you can save the better your financial position.
  7. Avoid excess debt. Your total monthly debt payments should be less than 38% of your gross income.  If your gross income is $10,000 per month, your debt payments should not exceed $3,800.
  8. Give money away. Do some good with the money you’ve accumulated with your smart and sensible investing.

You can find good reasons to scuttle your equities in every morning paper and on every broadcast of the nightly news. ~ Peter Lynch.

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

March 26, 2017

 

 

 

[1] http://www.econ.yale.edu/~shiller/data.htm, Robert Shiller, Long term stock, bond, interest rate, and consumption data accessed 3/26/2017.

Shaw’s Cove.

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Shaw’s Cove is a beautiful slice of paradise located in Laguna Beach.   While growing up my friends and I spent most of our day at Shaw’s Cove.  We went to Shaw’s because Main Beach would get too crowded in the Summer time.

We’d walk to Shaw’s equipped with three items: Boogie Board, snorkeling gear, and smashball.   Throughout the day, we’d use all three things.  If the waves were up, we’d ride our Boogie Boards.   If there were no waves, we’d go snorkeling.   When we got tired of being in the water, a rare event, we’d play smashball.   We’d repeat this process until we got hungry.  Our strategy prepared us well for all the beach conditions.   It was our version of being hedged.

An investor should be prepared for all market conditions.   A successful investor will own investments for growth, income and safety.   These three investments will treat you well over the long term.

Stocks are owned for growth.  The stock market is your long term, wealth generating machine.  The stock market will play a huge part in creating your family wealth.   The stock market does not rise every day or every year, of course.   During the fabled history of the stock market, there have been major disruptions to the long-term trend.   However, from 1926 to 2015 the S&P 500 has generated an average annual return of 10%.[1]

Bonds are owned for income.   Bonds are boring and stable and will also play a significant part in generating your family’s wealth.  Bonds pay predictable income allowing you to receive monthly, quarterly or annual income.    Bonds can also be owned for safety.   When the stock market is falling, bonds will usually rally.   From 1926 to 2015 long-term U.S. Government Bonds have averaged 5.6%.[2]

Cash is owned for safety.  Cash is king.  It’s always nice to have some dry powder.  Cash is safe and liquid.  If you need access to capital, look no further than cash.   When stocks or bonds fall, it’s nice to have cash on hand so you can buy them on the dip.   Cash can help you ride out a stock market correction.  With a strong cash position, you can afford to hold on to your stocks while they recover.   From 1926 to 2015, cash, as measured by the U.S. T-Bill, has averaged 3.4% per year.[3]

Stocks, bonds and cash are the cornerstone of a solid portfolio.   These three investments work in concert to help you balance your portfolio.   If you own more stocks than bonds or cash, you’re an aggressive investor.   If you own more bonds or cash than stocks, you’re a conservative investor.

A portfolio with 70% stocks, 25% bonds and 5% cash generated an average annual return of 8.57% from 1926 to 2015.   A $10,000 investment in 1926 is now worth $15 million.

A portfolio with 50% stocks, 35% bonds and 15% cash generated an average annual return of 7.47% from 1926 to 2015.  A $10,000 investment in 1926 is now worth $6 million.

A portfolio with 30% stocks, 50% bonds and 20% cash generated an average annual return of 6.48% from 1926 to 2015.  A $10,000 investment in 1926 is now worth $2.6 million.

As you can see from these examples, the more stock you own, the greater your long-term wealth.  It’s important to match your asset allocation to your financial plan and goals.  If your investments are in line with your goals, you’re likely to stick with your plan for the long haul.

I could not help concluding this man had the most supreme pleasure while he was driven so fast and so smoothly by the sea. ~ Captain James Cook

Bill Parrott is the founder and CEO of Parrott Wealth Management and a lover of the sea.   To obtain more information on investment management and financial planning, please visit www.parrottwealth.com.

March 23, 2017

Note: Your returns may be more less than those posted in this blog.

[1] Dimensional Fund Advisors Matrix Book 2016.

[2] Ibid.

[3] Ibid.

Worse Than A Stock Market Correction?

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Investors constantly scan the horizon looking for a stock market correction.  While investors sit on their front porch anticipating a stock market correction they leave their back door wide open.  Stock market crashes can be painful but a poor estate plan can cause permanent damage to your wealth.

Individuals spend most of their free financial time focusing on their stocks, bonds and funds without paying much attention to the state of their estate.  It’s not easy to ponder your mortality but it’s necessary if you want to protect your hard-earned dollars for your family.

Here are a few areas that can cause heart ache to your estate plan.

  1. No will or trust. If you die without a will or trust, it’s possible to lose 40% of your estate to the federal government in the form of an estate tax.  In addition to your tax loss, your remaining estate may end up in the wrong hands.  A client of mine inherited $4 million from his rich uncle who died without proper estate documents and, thus, my client had to write a $2 million check to the IRS for estate taxes.
  2. No life insurance. Individuals who own little or no life insurance run the risk of losing their assets to creditors in the untimely event of a death.  I’ve talked to several people who do not insure the stay at home spouse.   The breadwinner assumes, incorrectly, they’ll be able to take care of the home financially if the non-breadwinner spouse passes away.  How much life insurance is enough?  At a minimum, you should own enough life insurance to pay off all your debts, provide for your spouse’s life time income, and fund your children’s college education.
  3. No long-term care insurance. Long term care insurance is becoming a must have item.  The average monthly cost for LTC insurance is about $5,000.   The average stay in a LTC facility is about four years.  If you and your spouse enter a LTC facility at the same time, it’s possible you may spend $480,000 or more.  If you have the investments to self-insure, then LTC insurance might not be needed.  However, if you use your assets to pay for LTC, your family will be left without those resources.
  4. No beneficiary. It takes about two minutes to update your beneficiary information on your retirement accounts and insurance policies.  A beneficiary designation overrides all your estate documents including your family will and trust.   This might not be an issue if you’re happily married and don’t have any children.  However, if you are divorced and you forget to update your beneficiary information, then your assets may end up in the hands of your ex-spouse!
  5. No Umbrella Policy. An umbrella policy is cost effective way to protect your property.  The cost of adding a few extra million of insurance coverage to your property and casualty policy is minimal.  A house with a pool or horses or some other attraction should have an umbrella policy.

A solid financial and estate foundation will help protect your assets while you’re living and long after you’re gone.  I would recommend spending some time updating your insurance and estate planning documents.   After all, an ounce of provision is worth a pound of cure.

I have seen something else under the sun: The race is not to the swift or the battle to the strong, nor does food come to the wise or wealth to the brilliant or favor to the learned; but time and chance happen to them all. ~ Ecclesiastes 9:11.

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

March 21, 2017

 

 

Fixer Upper.

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Fixer Upper is one of my favorite shows.  The chemistry between Chip and Joanna Gaines is fun to watch and what they do to a home is nothing short of a miracle.  Their mantra is to buy the worst home in the best neighborhood.  If you’ve watched the show, they’ve purchased some horrible homes.  At times, I wonder what they were thinking because the homes were in such despair.  However, this is one of the key ingredients to their successful franchise.  By the end of the show their vision, toil and magic come to life in the form a completely transformed home.

Magnolia Market is in Waco.  Waco is a sleepy town on the Brazos River situated half way between Austin and Dallas and the home of the Baylor Bears.   Magnolia Market is a landmark in Waco sitting in the shadows of its two big silos.   The market is a destination for their legion of followers who watch their show.   My wife and I have visited the market several times, along with a few thousand other guests, and have not been disappointed.

The homes they buy are in such bad shape you’d think they’d tear them down and start over.   Because the homes are in a state of hopelessness, it allows the buyer to purchase it at a great price.   Several homes highlighted on the show have been purchased well below asking price.   To get the best price on any item, it must be purchased when pessimism is high.   The higher the pessimism, the lower the price. If everybody wanted to buy the best home in the finest neighborhood, the price would go through the roof.

After the home is purchased Chip goes to work on demo day.  It’s not uncommon for Chip to find more damage to the home once he starts knocking out walls and tearing up floors.   The issues he finds are sometimes major like foundation or plumbing issues.   Once Chip is finished with demo day, Joanna decorates the home and together they deliver an amazing home and experience for the new owner.

The stock market has its own version of Fixer Upper.  All stocks will move in and out of favor at times.   The best time to buy a stock is when no one wants to own it and it’s out of favor.  It’s during the dark days when an investor can pick up a bargain.

If you need proof, look no further than the four horsemen of the financial sector: Bank of America, Wells Fargo, JP Morgan and Citigroup.  These four banks traded to historic lows during the Great Recession before rebounding.  Since the low of the recession, these four stocks appreciated, as a group, 625%!  I’m not suggesting the stocks listed here will have the same rebound, however, to find a steal look for the worst stock in the best market.

Here are few retail stocks that have been demolished lately.  These stocks will need more than shiplap, paint and wooden beams for them to recover.  These companies are experiencing a high level of pain and need a little TLC.  If these stocks can get their house in order, then maybe they’ll find some love among investors.

  • Williams-Sonoma (WSM). WSM is trading around $50 per share after hitting an all-time high of $89.38.  WSM is the owner of Pottery Barn.  WSM has a current dividend yield of 3.01%.
  • Nordstrom (JWN). JWN is selling for $44 and its all-time high is $83.16.  JWN has a current dividend yield of 3.34%.
  • L Brands (LB). LB is priced at $50.75 and has fallen from its high of $101.11.  LB currently yields 4.80%.  LB is known for their main product line of Victoria’s Secret.
  • DSW Inc. DSW is a retailer of shoes.  The high on this company was $47.55 and its currently trading for $20.20.   DSW currently yields 3.88%.
  • Buckle (BKE). BKE is trading for $18.85 down from its all-time high of $57.68.  BKE currently yields 5.3%.

When buying a fixer upper patience, vision and faith are needed.  So, too, when you buy a stock that is currently down and out.

And the rain fell, and the floods came, and the winds blew and beat on that house, but it did not fall, because it had been founded on the rock. ~ Matthew 7:25

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

March 19, 2017

Note: Prices and yields are for 3/17/2017 only and are subject to change without notice.  Your returns may be more or less than those highlighted.  As always, do your homework before making any investment.  PWM owns shares in WSM and JWN.

 

 

 

A $4 Billion-Dollar Loss.

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Bill Ackman of Pershing Square Holdings recently sold his position in Valeant Pharmaceuticals realizing a $4 billion-dollar loss.  Valeant peaked in July of 2015 at a price of $257.53 and is currently trading around $11.  From peak to trough Valeant lost 95% of its stock market value.   For Valeant to return to its all-time high it will need to generate a return of 2,236%!

$4 Billion is a big number.  In fact, Mr.  Ackman could have given $12,500 to everyone in America.  A family of four would receive $50,000.   The gift from Mr. Ackman would’ve been tax free since the IRS allows individuals to give away $14,000 per person, per year to as many people as one wants.   Think of the good will Mr. Ackman could have generated.

In the United States, there are currently 5,272 publicly traded companies with a market cap of $4 billion or less.

4 billion seconds is the equivalent of 126.8 years.

During the heyday of Valeant, a client called to inquire if we should add the company to his portfolio.  After a quick visit to a few financial websites and some clicks on my trusted HP12C, I recommended we not purchase Valeant.   I’m thankful he doesn’t own it in his portfolio today.

What should you do if you’re in a situation where one of your investments has turned sour.  Here a few suggestions.

  1. Cut your losses. A small loss can turn into a large loss quickly.  It’s not easy to take a loss but your goal as an investor is to live to see another day.
  2. Limit your holdings. If you purchase individual stocks, limit your exposure to 3% to 5% for each company in your portfolio.  In the event your golden idea turns into a lead balloon, you can sell your holding and move the money into a new investment.  It’s easier to sell a stock when it is 3% of your portfolio versus 53%.
  3. Replace it with an index fund. If you no longer like your stock but love the sector, consider buying an index fund.  Instead of buying one stock, buy a few hundred through an index fund.  In the case of Valeant, Mr. Ackman could have purchased the Vanguard Health Care ETF.
  4. Don’t get married to a company. Don’t let your love for a company cloud your vision to what is happening to the stock price.  A good company can be a bad stock and vice versa.  There are plenty of other fish in the sea.
  5. Offset your gains with losses. In the unfortunate event you must take a loss use it to offset your gains.   You can offset gains with losses.

This is a big public loss for Mr. Ackman but, at the end of the day, he’ll be fine.  The Valeant story will make for a great business school case study at some point.  Hopefully we can all learn a thing or two from the Valeant trade.  To be a successful investor it’s important to study both winning and losing trades.

Blessed are those who find wisdom, those who gain understanding… ~ Proverbs 3:13.

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

March 15, 2017

 

 

 

 

How to Survive a Stock Market Correction.

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The Dow Jones Industrial Average continues to ascend to new heights.  The higher the market climbs, the more noise you’ll hear about a stock market correction.  At some point those calling for a market correction will be right.  Stock market corrections are typical and occur about every three to five years.   A bear (down) market will last about 18 months while a bull (up) market will run for about 8 years.[1]

How can you protect yourself against a bear market attack?

  1. Don’t panic! A market drop is normal, painful, but normal.
  2. Don’t make any changes to your portfolio during the initial phases of the market correction. Let the market find its footing before you make any major adjustments to your account.
  3. Cash is king. If you have a cash cushion, you’re less likely to make rash decisions regarding your stock holdings.   How much money should you keep in cash?  My recommendation is for you to hold two to three years’ worth of expenses in cash.  If your annual expenses are $50,000, then your cash amount should be in the range of $100,000 to $150,000.
  4. Diversify your assets. A balanced portfolio of stocks, bonds, cash and alternative investments will help cushion the blow from a market drop. During a market drop it’s likely your bonds will perform well.  During the 2008 market mauling long term U.S. government bonds rose 25.9%.[2]
  5. Rebalance your portfolio. By rebalancing your portfolio, you’ll take advantage of lower stock prices.  Rebalancing will allow you to keep your risk level and asset allocation in check.
  6. Eliminate your margin balance. A sure way to lose more than you intended is to use leverage.  If you’ve tapped the margin in your account to buy securities, I would encourage you to eliminate it entirely.   The best way to make a bad situation worse is to employ margin in a down market.
  7. Stay invested.  The two days following the stock market crash of October 19, 1987 the Dow Jones Industrial Average rose 16%.  Despite the dramatic drop of Black Monday, the Dow ended 1987 with a gain and has since risen 1,100%.
  8. Look for bargains. Is it possible your favorite stock is now 25% or 50% cheaper?  If you’re not sure what to purchase, focus on a broad-based index fund.   An index fund will allow you to gain market exposure with the click of your mouse.
  9. Think long term. A bear market lasts about 18 months.  It’s likely you’ll own your investments for years, maybe decades, before you need the money.   Thinking generationally will help get you through the dark days of a market downturn.
  10. Markets recover. The stock market has always recovered – always!  The Dow is currently trading near its all-time high.
  11. Have fun. The market will go up, down and sideways long after we’re gone.  Instead of marinating in a stew of worry get outside and enjoy your friends, family and hobbies.

Stock market corrections come and go.  The market is a long-term wealth creation machine that is occasionally interrupted with a pullback.  If you stick to these tips, you’ll have an opportunity to benefit from the stock markets long term performance.

Even though I walk through the darkest valley, I will fear no evil, for you are with me; your rod and your staff, they comfort me.  ~ Psalm 23:4.

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

March 10, 2017

[1] https://www.forbes.com/sites/robertlenzner/2015/01/02/bull-markets-last-five-times-longer-than-bear-markets/#12745f772dd5, Robert Lenzer, January 2, 2015, site accessed 3/10/17.

[2] Dimensional Fund Advisors 2016 Matrix Book.

Balance.

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We are nation in pursuit of balance.  We aim for a work life balance.  We try to balance our diet.  We balance our checkbooks. The tires on our cars must be balanced for a smooth ride.   It’s impossible to ride a bike without balance.  Scales must be balanced to get a true measure.

Investors should practice balance as well.  Unfortunately, investors rarely pursue a balanced portfolio.  Portfolios get too aggressive when markets rise and too conservative when markets fall.   Investors who do practice the art of rebalancing will keep their risk level in check.

Let’s look at a few brief moments in time to highlight this point.

1930

An investor who started the year of 1930 with a portfolio of 50% stocks and 50% bonds saw her equity drop to 25% by 1932.   The portfolio in 1932 consisted of 25% stocks and 75% bonds a mix too conservative for her long-term goals.   In fact, it wasn’t until 1949 before she regained a portfolio of 50% stocks and 50% bonds.  She had to wait nineteen years before her target allocation returned to normal.

2000

An investor who started the year 2000 with a 50% stock and 50% bond portfolio saw his stock allocation drop to 29% by 2002.   By the end of 2015 his portfolio was 35% stock and 65% in bonds well below his original allocation of 50/50.

2009

In this example, our investor started 2009 with a portfolio of 50% stock and 50% bonds.  A year later her portfolio was 60% stock and 40% bonds.  By the end of 2015 the stock allocation had risen to 65% and the bond portion had dropped to 35%, too aggressive for her long-term goals.

As you can see, balance is seldom maintained.  The investor must constantly battle the markets to keep their portfolio in line with their investment goals.  If you do nothing your portfolio will oscillate between too conservative and too aggressive.

Here are few tips to help you stay focused on rebalancing your portfolio.

  1. An annual rebalance is enough. Monthly or quarterly is too much.
  2. I would recommend rebalancing your accounts in January. A January rebalance will allow you take advantage of the prior year’s movement.  In addition, your dividends and capital gains have been credited to your funds.
  3. Your 401(k) plan may have an automatic rebalancing tab or button allowing you to set it and forget it. The tab should have a few options like monthly, quarterly or annually.  An annual rebalance will work best.
  4. It’s easier to rebalance a portfolio of mutual funds or ETF’s, than it is a basket of individual stocks and bonds. It’s not possible to sell a half share of stock or a third of a bond.   If you plan to incorporate a rebalancing program in your portfolio, stick with funds.
  5. It helps to automate the process so you can stick with your plan. It’s emotionally hard to sell stocks when they are rising and buy bonds when they are falling.  It’s even harder to buy stocks when they’re falling and sell bonds when they’re rising.  It will be beneficial to remove your emotions when you rebalance.
  6. If you’re a micro manager of your portfolio, you can rebalance when your allocation moves 5% up or down. This strategy takes some work but it can be done.

The key to long term success is to match your financial goals to your investment portfolio. Once your hopes, dreams and fears are identified, put your plan to work and rebalance often!

Life is like riding a bicycle. To keep your balance, you must keep moving. ~ Albert Einstein

Honest scales and balances belong to the Lord; all the weights in the bag are of his making. ~ Proverbs 16:11

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

March 8, 2017

 

 

And the Oscar goes to…

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The stars were aligning for La La Land until the unthinkable happened.  Warren Beatty and Faye Dunaway delivered the best picture category at the Oscars on Sunday Night and announced the winner – La La Land.   The crowd, along with a few billion-people watching around the world, were stunned to find out the actual winner was Moonlight.   Apparently, the accountant from PwC was tweeting during the show and this may have caused the blunder.

Investors are constantly worried about making mistakes.  Did I buy too late?  Am I selling too early? What if the market goes down?  What if interest rates go up?  Investors can die a thousand deaths contemplating all the negative outcomes they may incur.  Reacting to what might happen is worse than what will actually happen to your portfolio’s long term investment performance.

Here are few investment blunders.

Blunder 1.   An investor who purchased Apple in 1980 experienced a wild ride.  During Apple’s thirty-seven-year run it had year ending values where it lost over 30% of its value four times, 50% of its value twice and 70% of its value once!  How did this error turn out?  A $10,000 investment in 1980 is now worth $2.8 million dollars giving the brave investor an average annual return of 16.91%![1]

Blunder 2.  An investor who purchased the Vanguard 500 Index Fund (VFINX) on October 15, 1987 had to suffer through the worst one day stock market correction in history.   A few days later, October 19, 1987, the market fell 508 points or over 22%.  How did this gaffe turn out?  A $10,000 investment has grown to $147,000 providing an average annual return of 9.59%.[2]

Blunder 3.  Amazon is crushing the competition and is on the threshold of world dominance.  Amazon started trading in 1997.  During this fabled run, it had year-end losses of 15.83%, 22.18%, 30.47%, 44.65% and 79.56%!  Amazon has survived these major hits.   How did an investor do if they purchased Amazon in 1997?  A $10,000 investment is now worth $4.2 million providing an average annual return of 35.83%![3]

Blunder 4.  An investor who purchased the iShares S&P 600 Small Cap Index fund (IJR) on August 1, 2007 lost 35% of their investment value in less than two years.   A $10,000 investment in this fund is now worth $23,000 for an average annual return of 9.12%.[4]

As these four “mistakes” highlight it’s possible to recover and soar to new heights.  We’ve all made mistakes in life.  If you fumble, pick yourself up, dust yourself off, and move on.  Time will heal all wounds.

Here are a few suggestions to help you reduce your risk of making investment miscues.

  • Diversify your account with stocks, bonds and cash.
  • An automated monthly investment program will allow you to purchase stocks in rising and falling markets.
  • A cash position will soften the blow when stocks go down. When you experience a drop in price, use your cash to buy more shares.
  • Be patient and think long term.

The Hollywood elite will recover and I’m sure next year everyone, most everyone, will have a good laugh over this year’s most memorable moment.

Oscar and I have something in common. Oscar first came to the Hollywood scene in 1928. So did I. We’re both a little weather-beaten, but we’re still here and plan to be around for a whole lot longer. ~ – John Wayne, 1979 Academy Awards honoree.

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

February 28, 2017

Note:  Past performance is not a guarantee of future performance.  Your returns may be more or less than those posted in this blog.

 

[1] Morningstar Office Hypothetical Tool, February 28, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.