Day: August 17, 2017

Market Timing or Rebalancing?

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Market timers allegedly have models allowing them to move money flawlessly between global markets while avoiding all stock market corrections.  Market timers use a bevy of indicators like the CAPE ratio, Bollinger bands, and candlestick patterns to determine if their client should go long, short or neutral the stock market.

Tactical asset allocation is a fancy term for market timing but the process is the same.  Tactical asset allocation sounds more professional than market timing but the results are the same; trying to time the market is a waste of time.

Market timing is challenging because you must be right all the time and it must be repeated, correctly, for the rest of your life for you to outperform the more traditional buy and hold model.  Your tactical trading model might flash a sell signal today, but will it flash a buy signal tomorrow?

In a 2014 Dalbar study, the S&P 500 generated a 30-year average annual return of 11.1% while the individual investor made 3.7%.[1]   The market timer was left with less money when compared to the buy and hold investor.   A buy and hold investor who invested $100,000 in the S&P 500 made $2.35 million while the market timer made $297,000.   The buy and hold investor accumulated $2 million more than the market timer.

Dimensional Fund Advisors found a similar result amongst mutual funds.  In a fifteen-year study of equity mutual funds, only 17% of the funds they studied survived and outperformed their corresponding benchmark.[2]

Rather than trying to time the market, rebalance your account instead.   Rebalancing your account will align it with your financial goals.  Your financial plan will determine your asset allocation and investment selection.   For example, after completing your financial plan, you set your asset allocation to 60% stocks and 40% bonds.

In 2007, you invest 60% of your assets in the iShares S&P 500 (IVV) exchange traded fund and 40% in the iShares Core Aggregate Bond Fund (AGG) exchange traded fund.   If you didn’t rebalance your account, your asset allocation at the end of ten years was 67% stocks and 32% bonds and generated an average annual return of 6.43%.  Your current asset allocation is too aggressive based on your financial plan.  If you rebalanced your account annually, your 60% stocks and 40% profile remained intact and your portfolio generated an average annual return of 6.62%.[3]

You can rebalance your portfolio as often as you wish but annually is sufficient for most investors.  A January rebalance is recommended because it will incorporate the prior year’s capital gains and dividend income.

If you want to test your own market timing model, try darting in and out of traffic on a heavily congested highway and see how it goes.

Be very careful, then, how you live—not as unwise but as wise… ~ Ephesians 5:15.

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.

Note:  Your results may differ from those posted in this blog.

August 17, 2017

 

[1] https://www.fool.com/investing/general/2014/05/28/3-reasons-why-market-timing-doesnt-work.aspx,  Jay Yao, May 28, 2014.

[2] Dimensional Fund Advisors, Pursuing A Better Investment Experience, July 2017.

[3] Morningstar Office Hypothetical Tool.

It is time to sell. Everything!

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Is it time to sell everything?  You should not sell everything but you may want to sell something.  The stock market continues to underwhelm in 2016 and this trend looks like it may remain in the near term.   The fear of the downside is real and growing among investors especially if you pay attention to the posts, papers and pundits.   The general consensus among the masses is for the doom and gloom to linger. 

Should you be a seller?   Here is a list of individuals who should sell their stock holdings.

1.       You should sell if you need your money in one year or less.   According to Morningstar and Ibbotson the stock market has made money 73% of the time on a one-year basis between the years of 1926 and 2014.   However, the range is wide.  The best year was 1933 with a gain of 53.99% and the worst year was 1931 with a loss of 43.34% (Ibbotson®SBBI® 2015 Classis Yearbook).

2.       You should sell if you are going to buy something with the money invested in the stock market.  If you are going to buy a home, car, boat or plane then this money should be in cash.

3.       You should sell if you have to pay for an event like a wedding or a college education.   My daughter will be leaving the nest soon and heading off to college in the fall.   As a result, I sold half of her investment account two years ago and invested the proceeds in U.S. Treasuries knowing that a tuition payment is imminent.   I did not want to have 100% exposure to stocks before she left for college.

4.       You should sell if you are retiring in 3 to 5 years.   You don’t need to sell all of your stock holdings just enough to cover 3 years’ worth of household expenses.  For example, if your annual household expenses are $100,000, then you should have at least $300,000 in cash in your retirement or investment accounts.

5.       You should sell if you are up to your eyeballs in debt.  This can be mortgage, credit card, consumer, auto or margin debt.  Debt is debt and the less you have the better.  A rule of thumb is that your total monthly debt payments should be less than 38% of your gross income.  For example, if your gross income is $10,000 per month, then your total debt payments should be no more than $3,800.

6.       You should sell if you don’t have a financial plan.  If you don’t have a financial plan, this is analogous to driving a car without a steering wheel or sailing a ship without a rudder.   How can you invest your assets if you have no idea where you are going?  A financial plan will help guide your investments and make you a better investor.   A well-constructed financial plan will be your life guide.

7.       You should sell if your account is 100% invested in stocks.   A portfolio that is invested in 100% stocks has had an average annual return of 10.1% with a standard deviation of 20.1.   A portfolio that is 70% in stocks and 30% in bonds has had an annual return of 9.2% and a standard deviation of 14.3.  The bonds reduced your risk by 29% and your returns by .9% per year.   The time frame for these returns is from 1926 to 2014. (Ibbotson®SBBI® 2015 Classis Yearbook).

8.       You should sell if you can find a superior long term investment that outperforms great American and International companies.

9.       If you do not fall into one of the above categories, then you should be a buyer of stocks!

Happy Investing.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  www.parrottwealth.com

1/30/16

 

 

 

Planes, Trains and Indices.

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Planes, Trains and Automobiles is a great movie starring Steve Martin and John Candy.   This 1987 comedy was all about Steve Martin’s character trying to get home for Thanksgiving.    He and his new BFF, John Candy, were using all means necessary to get home for the holidays.   Steve Martin’s character did not care how he got home so long as he got home.

As we launch another trading year should you be more concerned with outperforming and index or arriving at your financial destination?  It is common for investors to focus on an index, usually the Standard & Poor’s 500, as their primary benchmark.   An investor will consider their investment year a success if they outperformed this index even if it was down for the year.   A relative outperformance is considered a victory for most.

There are a few issues with trying to outperform a standard benchmark.   Standard & Poor’s website references that they track over 700,000 indices in real time.   700,000!  If you were going to benchmark to an index, which one of the 700,000 indices would you choose?   If you are an investor with a diversified portfolio, you may only have 15% or 20% exposure to the companies in the S&P 500.  The majority of your portfolio will be linked to some other asset class like small companies, international companies, bonds, real estate, commodities or cash.   These asset classes will have little, if any, connection to the S&P 500 index.    It is recommended to broaden your market benchmark to combine all of your asset classes.  A blended benchmark will give you a better picture of your overall portfolio performance.

To follow up on Planes, Trains and Automobiles, if I am scheduled to fly from Los Angeles to New York should I be concerned that there are other planes flying to Bend, Austin or Denver?   Should I be concerned that there is more than one flight to New York and some of the planes will arrive before mine does?  The answer is no!  My only concern should be for me to arrive in New York on my scheduled flight.

As you travel through 2016 it is recommended to focus on your own goals and not worry about which one of the 700,000 indices is up, down or sideways.   Your investment and financial plan should be collaborated to your hopes and dreams and no one else’s.  If you arrive at your financial destination on your terms, then I would consider that a huge success!

Do you not know that in a race all the runners run, but only one gets the prize? Run in such a way as to get the prize. 1 Corinthians 9:24

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  www.parrottwealth.com.

1/4/16

 

Are Forest Fires Good?

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The Yellowstone National Park fire of 1988 was one of the largest in U.S. history.   It burned over 1 million acres.  On “Black Saturday”, the worst day of the fire, it consumed over 150,000 acres.[1]

This fire was devastating in terms of acreage burned and animals lost, but it also was a re-birth for the park.   The fire allowed new life to rise from the ashes.  A forest fire is needed to clear out brush, dead trees and other items so new life can begin to grow.   Birds and bears returned to the burned area to nest and feed.[2]

My family and I visited Yellowstone in 2004 and were awed by the park’s beauty.   We spent some time exploring the area burned by the fire.   The once scorched earth was now covered with millions of trees.  The park ranger told us not one tree was planted by human hands.  All the trees were allowed to grow as a result of the fire.  He mentioned for the seeds to open they need heat similar to a popcorn kernel.  If not for the fire, these trees wouldn’t have been allowed to take root and grow.

A forest fire brings new life so, too, will a stock market correction.  Like a forest fire, a stock market correction, is not fun to experience but needed.  For a recovery to take hold there has to be some destruction.  When the stock market is falling it feels like the correction will never end.  During a down draft is when people abandoned their investment strategy not realizing better times are ahead.

According to the Reformed Broker the average stock market correction results in a drop of 13.3% and lasts 71 days while a recovery lasts 221 days and has an average annual return of 32%[3]

Let’s look at some recent history.   The Dow Jones rose 83% from the lows of the Tech Wreck in the early 2000’s and climbed 6,339 points.  Since the lows of the Great Recession in 2009 the Dow Jones Industrial average is up 148% and has climbed over 10,000 points.   An investor who sold their stock holdings during the last two corrections missed these epic rebounds.   It should be noted the stock market has never lost 148% of its value.

According to a study by Dimensional Fund Advisors of stock market performance from 1970 to 2015 found investors who missed the 25 best days saw a huge drop in their investment returns.  A buy and hold strategy during this 45-year stretch turned a $10,000 investment into $89,678.  If you missed the 25 best days during this run, your $10,000 grew to $21,224.  By timing the market, you “lost” a lot of money.  A $10,000 investment in U.S. T-Bills during this same period is now worth $9,195.[4]

What happened to Yellowstone a year after the fire?  The visitors returned in droves to Yellowstone National Park.  In 1989 the attendance for the park reached a record for the decade with over 2.6 million visitors![5]

Remember a recovery always follows a correction.  Don’t get burned by trying to time the market!

for our “God is a consuming fire.” ~ Hebrews 12:29.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  www.parrottwealth.com

5/19/2016

 

 

[1] http://www.yellowstonepark.com/1988-fires-yellowstone/

[2] https://www.nps.gov/yell/learn/nature/upload/firesupplement.pdf

[3] http://thereformedbroker.com/2013/08/20/a-field-guide-to-stock-market-corrections/

[4] Dimensional Fund Advisors – Performance of the S&P 500 Index, 1970 – 2015.

[5] http://www.ksl.com/?sid=26482639