Month: December 2017

I’m Proud of You!

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Well done!  Bravo!  I’m proud of you for staying invested in the stock market for the entire year.  Despite political unrest, nuclear threats, fires, floods, and hurricanes you didn’t waiver.  Your resilience has paid off handsomely and you’ve been rewarded with outsized gains.

It was a stellar year for investors.  The Dow Jones Industrial Average returned 25.5% and the S&P 500, 19.8%.   A balanced portfolio consisting of 60% stocks and 40% bonds produced a one-year gain of 14.8%.

Here are some highs (and lows) that made 2017 special:

  • Donald J. Trump was inaugurated as the 45th President of the United States.
  • North Korea tested multiple missiles.
  • 1 Million women marched on Washington D.C. for women’s rights.
  • Star Wars: The Last Jedi, Beauty and the Beast, and Wonder Woman dominated the box office.
  • The U.K. filed Article 50 to leave the European Union.
  • SpaceX launched over a dozen rockets.
  • The total solar eclipse mesmerized viewers.
  • Hurricane Harvey destroyed a large swath of Houston, Texas.
  • Hurricane Irma terrorized the Caribbean doing the most harm to Puerto Rico.
  • The Houston Astros won their first ever World Series, beating the Dodgers in 7 games.
  • The New England Patriots won the Super Bowl – again.
  • The California Wildfires torched over 1 million acres.
  • The horrific, senseless tragedy in Las Vegas.
  • Leonardo da Vinci’s painting, Salvator Mundi, sold for $450 million.
  • The International Olympic Committee banned Russia from the 2018 Winter Olympics.
  • The Federal Reserve raised its benchmark interest rate.
  • Congress passed the Tax Cuts and Jobs Act.
  • Bitcoin is at the center of the crypto currency craze.
  • Prince Harry is engaged.
  • Always Dreaming won the Kentucky Derby.

As we move towards 2018 I’d encourage you to follow your financial plan and stay invested.   One of the best ways to create long-term wealth is to own quality stocks from around the world.  A balanced portfolio of low cost mutual funds will give you the exposure you need to participate in the upward trend of the stock market.  Furthermore, a buy and hold strategy will allow you to enjoy the market’s historical returns.

Give yourself a pat on the back and celebrate your good year!  Well done! Bravo! Encore!

The more you praise and celebrate your life, the more there is in life to celebrate. ~ Oprah Winfrey

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 29, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed and may lose value.

 

 

The End Is Near!

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The end of the year is here. Was 2017 successful for you? Did you obtain your goals? I hope you had a prosperous year.

Tony Robbins is a master of setting goals and he uses the acronym SMART which stands for specific, measurable, achievable, realistic, and time-frame.[1] These five ingredients are key to achieving goals.   My goal of wanting to lose 5 pounds by April 1 meets these five criteria.

In addition to his list it’s paramount to write your goals down and commit them to paper. Tom Clancy said, “If you don’t write it down, it never happened.” Written goals are like magnets pulling you closer to your dreams.  In a study by Dr. Gail Mathews she found “that you become 42% more likely to achieve your goals and dreams, simply by writing them down on a regular basis.”[2]

However, writing your goals down doesn’t guarantee success. You must track and review your goals on a regular basis.  A monthly or quarterly review will allow you to adjust your goals as needed.

Goal setting is key to achieving financial success.  Written investment goals can help you track your results.  Your financial goals should follow the SMART model.  I want to have a lot of money someday is a dream, not a goal.  But if I change it to say I want to have $1 million by December 31, 2018 then it becomes a goal that can be measured.

In a few days the new year will be upon us and you can use this time to write down your 2018 goals.  Here are five suggestions to help you achieve financial success in 2018.

  1. Have a plan. A financial plan will commit your goals to paper. It will include specific dollar amounts with dates, so you can track your progress.
  2. Benchmark your assets. Compare your investment returns to a benchmark that resembles your portfolio.
  3. Review. A quarterly review of your financial plan and investment accounts will allow you to adjust your goals as needed.
  4. Update. It’s okay to adjust your goals throughout the year. If you obtain a goal early in 2018, then raise the bar or add a new goal.
  5. Work with an advisor. A Certified Financial Planner® is your accountability partner who will keep you moving toward your financial goals.

Here is a list of books to help you kickstart your 2018 goals.

  1. The Magic of Thinking Big by David J. Schwartz, Ph.D.
  2. Braving the Wilderness by Brene Brown
  3. The Power of Positive Thinking by Norman Vincent Peale
  4. Think and Grow Rich by Napoleon Hill
  5. 7 Habits of Highly Effective People by Stephen Covey
  6. Awaken the Giant Within by Tony Robbins
  7. Make Your Bed by Admiral William H. McRaven

Alexander Graham Bell said, “When one door closes another opens.”  So, let’s close out 2017 and turn our attention to the new year with new goals, dreams and ideas.

“Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.” —Pablo Picasso

“Just when the caterpillar thought the world was over, she became a butterfly.” ~ Barbara Haines Howett.

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 28, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.

 

[1] https://www.tonyrobbins.com/ask-tony/can-create-compelling-future/, website accessed 12/28/2017.

[2] https://www.huffingtonpost.com/marymorrissey/the-power-of-writing-down_b_12002348.html, by Mary Morrissey, 12/6/2017.

To Protect and Serve.

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First responders are remarkable people and real heroes.  They charge into danger when others flee.  Police officers, fire fighters and military personnel live to protect us, so we can enjoy our freedom.

My family had (has) many friends who were members of the Los Angeles Fire Department and when I was young I loved listening to their stories of dramatic rescues and magnificent fire fights.  They appeared larger than life as they detailed their acts of bravery.   One of these mighty firefighters was Gary Nelson who passed away this year.  He was described as the “Wise Man of the Mountains” in a 1995 Los Angeles Times article.[1]

One of my roles as a financial planner is to protect my clients from greed and fear by managing their emotions.  I don’t want them to get overly euphoric or severely depressed when it comes to the performance of their investments.  Instead, I want them to follow their plan, so they can reach their financial goals.

During a rising stock market investors forget their risk tolerance by allocating more money to stocks.  Bonds and cash are considered villains because they curtail the portfolio’s rise.   When stocks are climbing my role is manage risk and curb enthusiasm to give them realistic expectations based on their financial plan.

When the stock market falls investors get depressed. It feels like the beginning of the end for most and all they want to do is sell their stocks.  At market lows they’ll abandon their financial plan and look for the nearest bunker. When clients are in this emotional state my role is to give them hope and encouragement.  I let them know that bear markets don’t last forever, and good times will be here again.

To be fair to first responders, I’m never in harms way.  I’ve never run into a burning building or exchanged gun fire with an enemy. I sit at a desk in a climate controlled office protected from the elements.  However, I have a strong desire to protect clients from making catastrophic or disastrous financial decisions.

I receive several investment requests from clients and if it fits into their financial plan and moves them closer to their goals, I’ll add it to their account. Of course, if it doesn’t make sense I’ll say so and give them better options.  Knowing my clients through the financial planning process, regular conversations and review meetings allows me to make decisions that are in their best interest.

How can you protect your portfolio in 2018?

  1. Complete a financial plan. It will be your guide for achieving financial success. Your plan will formalize your goals into practical and attainable items.
  2. Rebalance your portfolio. January is an ideal time to rebalance your portfolio because you’ve received all your capital gains, dividend and interest payments from the prior year. Following a year where the stock market did well your asset allocation has probably skewed more towards stocks.  For example, if you started the year with a 60% stock allocation, you may now have 70%.  In this case, sell 10% of your stock holdings and move the proceeds into your bond investments.
  3. Reduce your concentrated positions. If you own an investment that’s more than 25% of your portfolio, sell it down to a limit of 10% or less. This will reduce your concentration risk.
  4. Invest your cash. If you have a large cash holding, consider buying U.S. Treasuries. You’ll earn a higher rate of interest and your money will be guaranteed.
  5. Fund your tax deferred accounts like your 401(k) plan or Individual Retirement Account. If you have children, consider a contribution to a 529 plan. Tax deferred or tax-free growth will allow you to keep more of your hard-earned dollars.
  6. Update your family will or trust. The new year is an excellent time to review your estate documents.
  7. Review your beneficiary designations on your retirement accounts, insurance policies and benefit programs.  If you’re recently married, widowed or divorced, a quick review of your beneficiary designations will insure your money will be delivered to your loved ones.
  8. Work with a Certified Financial Planner® who’s a fee-only, registered investment advisor. An RIA is a fiduciary and legally obligated to act in your best interest unlike a broker.

As we roll into 2018 review your financial assets and documents to make sure you’re protected from harm.  An ounce of prevention is better than a pound of cure!  Also, the next time you see a first responder, say thank you!

Greater love has no one than this, that one lay down his life for his friends. ~ John 15:13

I’ve always seen first responders as unsung heroes and very special people because, when everyone else is running away from danger, they run into it. ~ Dwayne Johnson

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 26, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.  Options involve risk and are not suitable for all investors.  Photo Credit: Marie Appert, Rose Parade, 2012

 

 

 

[1] http://articles.latimes.com/1995-02-12/magazine/tm-30931_1_county-fire, Patrick Goldstein, 2/12/1995.

Index Fusion.

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Fusion dining combines culinary delights from different cultures like Mexican and Chinese or Korean and Puerto Rican.  It blends the best of both cultures into one to try and please the palate.  Some fusion items include wasabi mashed potatoes, kimchi and avocado quesadillas, sake soy guacamole, and Japanese fish tacos.[1]

If it’s possible to fuse culinary indulgences why not apply it to investments?

Individual investors typically buy large-cap, blue chip stocks in names they know and trust with a tilt towards growth or value.  Growth investors favor momentum stocks with strong earnings and little dividend income like Facebook, Amazon and Netflix.  Value investors search for dividend income from companies like AT&T, IBM or Exxon.  It’s uncommon for individuals to own both growth and value stocks.

There are a few pitfalls in this strategy.  If an investor holds mostly growth or value stocks, they can miss strong moves from the style they don’t own.   For example, growth is outperforming value this year by 12.25%.  In 2016, value outperformed growth by 11%.[2]

In addition, individuals who concentrate on U.S. based companies ignore international ones.  International stocks account for about 48% of the global market cap so bypassing this asset class can leave a hole in your portfolio.  International developed markets have risen 20% this year and emerging markets have climbed 26%.

Bypassing small companies is another issue with a large-cap only portfolio.  Small-caps have outperformed large -caps by a wide margin and since 1928 they have gained more than five times large-caps.  A $1 investment in small stocks has grown to $21,413 and large stocks, $4,129.[3]

Finally, it’s difficult to achieve diversification with a portfolio of individual stocks.  Morningstar’s data base of global stocks includes 111,000 companies. You may own 30 to 40 stocks, a tiny fraction of the available options.  A 20-year study by Dimensional Funds found that owning all stocks produced an annual gain of 7.2% but if you excluded the top 25% of performers each year your average annual return dropped to a negative 5.4%.[4]

Here are three suggestions on how to fuse investment styles and beliefs.

  1. Invest in a diversified portfolio of low, cost mutual funds. A balanced portfolio of U.S. stocks, international stocks and bonds will give you access to 1,000s of investments.   A mutual fund portfolio consisting of 80% stocks and 20% bonds managed by Dimensional Fund Advisors owns 15,256 investments from around the world.   It’s up 17.25% for the year and has returned 10.98% per year for the past five years.[5]
  2. If you want to own individual stocks, allocate 5% to 10% of your capital to a few names and then index the remainder.
  3. Complete a financial plan to determine your asset allocation mix and risk tolerance. Your plan will help formalize your financial goals and define your investment selection.

January is a great time to review your accounts and look for new opportunities.  2018 could be your year to feast on investments from around the globe.  Bon appetit!

And what, Socrates, is the food of the soul? Surely, I said, knowledge is the food of the soul. ~ Plato

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 21, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed and can lose money.  Options involve risk and are not suitable for all investors.

[1] https://www.sunset.com/food-wine/flavors-of-the-west/fusion-cuisine#fusion-cuisine_2, website accessed 12/18/17.

[2] Vanguard ETF’s: VUG and VTV, 2016 and 2017 returns.

[3] Dimensional Funds 2016 Matrix Book.

[4] Dimensional Funds Investment Principles: 1994 – 2015.

[5] Dimensional Funds 80/20 portfolio: DFEOX, DFSTX, DFIEX, DFCEX, DFREX, DFTEX ending 12/20/2017.

2018 Stock Picks.

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The parade of 2018 stocks picks are appearing on popular social media sites and in traditional financial magazines.  Brokerage firms, money managers and financial journalists are touting their best ideas for legions of investors. These sage stock pickers dispense names that are expected to outperform the general population of publicly traded companies.

Last year I published a list of 15,000 stocks to buy and, as a group, they did well.  The companies were owned in six different mutual funds managed by Dimensional Fund Advisors:  Core Equity I (DFEOX), US Micro Cap (DFSCX), US Small Cap (DFSTX), Real Estate (DFREX), International Core (DFIEX) and Emerging Markets (DFCEX).   The portfolio has generated a YTD return of 17.5%.  The best performing fund has been the emerging markets fund up 31.67%!

The S&P 500 is having a stellar year, up 20.13%.   It has been led by Align Technology, Boeing, and Nvidia as all three have posted gains greater than 75%.  However, not every stock in the index has done well.  About 100 companies have a negative return and half the stocks, including the 100, are underperforming the index.

Hendrik Bessembinder, finance professor at Arizona State University, published a paper Do Stocks Outperform Treasury Bills?[1]   He examined the performance of 25,782 stocks from 1926 to 2015.  The stocks produced monthly gains 42% of the time and the top 4% of stocks (1,031) accounted for the entire dollar gain in the market.  T-Bills never lost money in his study.  Despite this, stocks crushed T-Bills over the long term by a multiple of 256 to 1.  A $1 investment in T-Bills was worth $21 at the end of 2015 and $1 invested in the S&P 500 grew to $5,386.[2]

The best way to make money in the stock market is to own all the winners and avoid all the losers but this isn’t possible.  Blue chip franchises like GE, Alaska Air, Campbell Soup, Kroger’s, Walgreen’s, Harley Davidson and AutoZone are all down double digits this year.  Riot Blockchain, on the other hand, is up 870% because of its name.  Riot Blockchain was called Bioptix prior to its name change, a failed medical business.[3]  I’d be surprised if Riot Blockchain was on any list of stocks to buy in 2017.

As you research ideas for your portfolio focus on your financial plan and long-term goals.  Your plan will determine your investment selection and asset allocation.  It will also help you avoid getting get caught up in market hysteria or from being whipsawed by short-term trading moves.

Money is made by sitting, not trading.  ~ Jesse Livermore

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 18, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.  Options involve risk and are not suitable for all investors.  Photo Credit: Marie Appert, Rose Parade, 2012

[1] https://www.marketwatch.com/story/why-picking-stocks-is-only-slightly-better-than-playing-the-lottery-2017-06-28, 9/19/2017, Paul A. Merriman

[2] Dimensional Fund Advisors 2016 Matrix Book.

[3] https://www.fool.com/investing/2017/12/18/why-riot-blockchain-stock-is-soaring-on-monday.aspx, Jordan Wathen, December 18, 2017.

Do You Fly First Class?

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Flying first class is an incredible experience and enhances the pleasure of travelling.  I’ve relished the warm towels, fine dining and exceptional service of first class travel.  Unfortunately, I’ve also sat in the last row sipping diet coke from a plastic cup while rationing pretzels.

Does it pay to fly first class?  Regardless of where people sit all passengers will take off and land at the same time.  A Delta One round-trip ticket from Los Angeles to New York costs $4,258 and the economy seat costs $552.  Is the experience of flying first class 7 ½ times better than economy?  It might, especially if you’re receiving value for the price you paid, and your expectations are being met.  When I fly first class my expectations are high; when I sit in economy they’re low.

Like the airline industry, mutual funds have a wide divergence in fees.  Unlike the airline industry, shareholders don’t benefit from higher fees.  Quite the opposite as high fees will lower your investment returns.  Higher fees won’t deliver a better investment experience.

Below are three funds with different fee structures listed from the highest fees to lowest.[1] The Dimensional Fund has the lowest fee and highest return.  Its fees are 90% lower than the Dreyfus fund.

Dreyfus Tax Managed Growth Fund Class C (DPTAX) has a one-year deferred sales charge of 1% and ongoing fees of 2.10%.  It has generated an average annual return of 5.74% for 10 years.

Gabelli Asset Fund Class A (GATAX) has a front-end commission of 5.75% and ongoing fees of 1.36%.  It has generated an average annual return of 7.21%.

Dimensional Fund Advisors U.S. Core Equity 1 Portfolio (DFEOX) doesn’t have a sales charges but it does have an ongoing fee of .19%.  It has generated an average annual return of 8.88% for 10 years.

How do you know if you’re paying high fees?  Here are three ideas.

  1. Fee audit. A review of your investment holdings will highlight the amount of your fees you’re paying.  Your fees can be benchmarked to industry averages.
  2. Fund Comparison. Comparing funds side by side will allow you to make better investment decisions.  In addition to the fee structure, you can compare returns, holdings, asset levels, and management tenure.
  3. Advisor Fees. If you work with a Registered Investment Advisor, the fees are listed in their Form ADV, a public document.  RIA’s are regulated under the Investment Advisors Act of 1940 and they must disclose their fees.  Brokers and insurance agents aren’t required to disclose their fees.  If you work with a broker or insurance agent, you’re going to have to work hard to uncover the fees you’re paying.  An independent advisor can help you decipher their fees.

In a few weeks you’ll receive your 2017 year-end statements giving you the opportunity to analyze the fees you paid.  January is also great time to review your financial plan and investment goals.  Are your fees hindering your plan?

2018 could be the year you upgrade to first class and start working with an independent, fee-only, fiduciary advisor!

Wise men and women are always learning, always listening for fresh insights. ~ Proverbs 18:15.

 

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 13, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.  Options involve risk and are not suitable for all investors.

 

 

[1] Morningstar Office Snapshot, ten-year return ended 11/30/2017.

Why Own Bonds?

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Bonds are boring, secure and predictable.  Interest rates are at historical lows because of this high level of safety.   The 30-Year Treasury Bond is currently yielding 2.75%.  With rates this low does it make sense to own a bond for three decades?

Interest rates are low, but they’re expected to rise in 2018.  Rising rates means more income for bond holders.  However, this could be trouble because when rates rise, bond prices fall.   A 1% rise in interest rates will lower the price of the 30-Year Treasury Bond by 17.8%.

Investing is a tradeoff between short and long-term goals.   Stocks and bonds can be used together to help you achieve your financial goals.  A diversified portfolio of stocks, bonds and cash is recommended.

Stocks have outperformed bonds because of the risk associated when investing in the stock market.  This is referred to as the equity premium and economist have pegged it at 5.5% over a 30-year period.[1]   If a risk-free bond is paying 2%, then stocks should return 7.5%.

Three reasons to own bonds.

  1. If your time horizon is less than three years, owning high quality bonds is recommended.
  2. If you need to meet an obligation like a college tuition payment or the purchase of a new home.
  3. If you’re retired and need a secure income stream.

Three reasons to own stocks.

  1. If your time horizon is longer than 20 years, buy stocks. They’ve averaged a 10% return per year since 1926 and they’ve never lost money over a 20-year period.
  2. If you’re contributing to your company retirement plan, allocate a large percentage to stocks. Your money shouldn’t be touched for many years so take advantage of the long-term trend of the stock market. You’ll also purchase stock through a payroll deduction and this will help smooth out the short-term volatility of the stock market because you’re buying at different price points.
  3. If you want to create long-term wealth, stocks must be the focal point of your portfolio.

Let’s compare the performance of stocks to bonds with two Vanguard Funds – The S&P 500 Index Fund and The Total Bond Market Index Fund.   From 12/11/1986 to 11/30/2017, the S&P 500 Index Fund averaged an annual return of 9.74%.  A $100,000 investment 31 years ago is now worth $2.06 million.  A $100,000 investment in the Total Bond Market Index on the same day is worth $597,556 and it generated an average annual return of 5.94%.  The stock fund outperformed the bond fund by $1.46 million or 3.8% per year.[2]

A financial plan can assist you in deciding how much to allocate between stocks and bonds.  These two investments have different characteristics, and therefore they both belong in your portfolio.

Without good direction, people lose their way; the more wise counsel you follow, the better your chances. ~ Proverbs 11:14 (MSG)

 

 

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 11, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments aren’t guaranteed and involve risk.

 

 

 

 

 

[1] https://www.investopedia.com/terms/e/equityriskpremium.asp, website accessed 12/11/17.

[2] Morningstar Office Hypothetical Tool, 12/11/1986 to 11/30/2017.

Go Navy!

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The United States Navy has protected America for more than 242 years by patrolling the earth’s oceans.   This is no small task as 70% of the world is covered in water.

At the center of this global force for good is the aircraft carrier.  It’s a powerful asset supported by a carrier strike group.   A group consists of an aircraft carrier, two guided-missile cruisers, two destroyers, one frigate, two submarines, a supply ship, and 65 to 70 aircraft.  It also includes about 7,500 personnel.[1]

The U.S.S. Ronald Reagan is one of the Navy’s largest and most sophisticated ships.  The ship’s motto is, “Peace Through Strength” and its guiding principles include professionalism, integrity, and operate as a crew.  It consists of several thousand professionals doing their job but acting as one crew to deliver excellence.[2]

The group is 100% on watch and it’s constantly looking for threats above, below and an on the water.  This efficient team works in concert to insure we can sleep peacefully.

Investors should create their own financial version of a carrier strike group.

At the center of your group should be your financial plan because it will help you formalize your financial goals and it will drive your asset allocation and investment selection.   It will also include a time-line for achieving your goals and it will assist you in charting a course for success.  When a carrier strike group leaves a port like San Diego they do so with a destination in mind, so, too, should your plan.

A team of advisors can help you achieve your goals to make sure your financial foundation is well fortified.  Your supporting cast can include a financial planner, investment advisor, attorney, accountant and insurance agent.  Part of the vision statement from the U.S.S. Ronald Reagan is “to do what is right and what is necessary, even when it is difficult.”[3]  Your advisors should apply this same metric when offering you advice and guidance.

The investment portfolio you construct should consist of high quality, low cost funds diversified across large, small and international companies with bonds and cash added to reduce risk and volatility.  Your portfolio will consist of thousands of individual securities.  A portfolio of four funds managed by Dimensional Fund Advisors (Core Equity I – DFEOX, International – DFIEX, Small Cap – DFSTX and Fixed Income – DFAPX) will own over 10,000 securities.  On any given day these individual investments may be up, down or sideways.  The daily movement of these securities are trading independently but act as one portfolio to help you achieve your goals.   An equal weighting to these four funds generated a one-year return of 17.18%.[4]

Tactical trading strategies may enhance your returns or protect your portfolio.  Adding individual stocks or stock options to your account will allow you to be nimble in the short-term.   The stock market may behave irrationally in the short term giving you an opportunity to buy or sell investments at more favorable prices.  The U.S.S. Hewitt is a destroyer and a supporting cast member to a carrier strike group.  A destroyer is used to protect the aircraft carrier because it’s fast, nimble and maneuverable.  It can be more tactical with short terms moves when compared to the massive aircraft carrier.

The supply ship is probably the unsung hero of a carrier strike group.  These ships are needed to refuel and restock the ships in the group.  Without the supply ship the group probably wouldn’t get very far.  To replenish a ship, the group must stop or slow down to receive her new supplies.   The USS Arctic is a supply ship and it can carry 177,000 barrels of oil, 2,150 tons of ammunition and 500 tons of dry goods.[5] Each year you should stop or slow down to review your investment accounts and financial goals to make sure you’re still on the right course to realizing your dreams.  A short-term pause will be beneficial to your long-term goals.

As we approach the new year I recommend spending time to create your financial strike group, so you can improve your odds of achieving financial success.  The end of the year is a great time to review your financial situation to make sure you have the right team and investments in place for your long-term goals.

Last, I want to thank my cousin, Peter Snyder – USNA ’90, for his service to our country and his help with my blog.

Anchors Aweigh!

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 7, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.  Options involve risk and are not suitable for all investors.

 

 

 

 

[1] https://science.howstuffworks.com/carrier-group2.htm, by Marshall Brain, website accessed 12/6/17.

[2] www.reagan.navy.mil, this an official website of the U.S. Navy, site accessed 12/9/2017.

[3] Ibid.

[4] Morningstar Office Hypothetical Tool, the fund symbols are DFEOX, DFIES, DFSTX, DFAPX, one year ended 11/30/20017.

[5] Msc.navy.mil and Wikipedia, sites accessed on 12/9/2017.

Rotate!

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The Earth rotates around the sun.  The wheel rotates allowing us to travel with ease. Baseball, football, and basketball each rely on rotation.  Records and CDs rotate to create beautiful music.[1]

The past few trading days growth sectors like technology have sold off while beaten down sectors such as retail have rallied.   The reason given for the selloff has been rotation as investors rotate between sectors.

What does rotation mean?  It means people sell high flying stocks to buy stocks offering more value.  Investors try and bounce between winners and losers hoping to sell at the top and buy at the bottom.

Rotation also means moving money between growth and value sectors.  Growth and value stocks will zig and zag throughout a market cycle.  Growth companies typically have strong revenue and earnings growth.  They pay little, if any, dividends as they plow their earnings back into the company to fund their explosive growth.  These companies tend to trade at higher valuations based on traditional benchmarks like the price to earnings ratio.  A few companies in the growth sector include Amazon, Facebook, and Nvidia.

Value companies usually have high dividends and low valuations.   These companies are mature and have been publicly traded for decades.  Companies in the value sector include Exxon, J&J, and JP Morgan.

Should you try to trade between growth and value?  Does it make sense to try and time the market so you’re either invested in growth or value?  Trying to move money between hot and cold sectors will give your portfolio lukewarm returns.  In addition, trading between sectors may increase your tax bill and lower your total return.

In 2016 the Vanguard Value Index Fund (VIVAX) returned 16.75% and the Vanguard Growth Index Fund (VIGRX) 5.99%.  The value fund outperformed the growth fund by 10.76%!  If you were chasing returns between growth and value, you would’ve sold your growth fund to buy the value fund.[2]

In 2017 the growth fund is up 26.73% and the value fund 15.27%.  The growth fund is outperforming the value fund by 11.46%!  Selling your growth fund last year to buy the value fund wouldn’t have been wise.

The two funds have rotated between outperforming and underperforming each other for many years so trying to move money between the two is foolish.  In fact, the 15-year total return for the growth fund is 9.62% and the value fund has returned 9.61%.

A $10,000 investment in these two funds in 1992 has generated similar results.  Today the value fund is worth $100,249 and the growth fund $98,048.  The difference between the two funds for the past 25 years has been $2,201 or $88 per year.

Here are few ideas to help you with your portfolio:

  • Diversify your holdings so you can take advantage of multiple sectors because you never know which one will do well. In the chart below from Dimensional Fund Advisors it shows three different companies: A, B & C.  These companies have had different price movements over time but when they are all included in your portfolio it will smooth out the long-term returns.

DFA Chart

 

  • Don’t let short-term market moves derail your long-term goals.  The stock market is constantly moving up and down so try not to sell at the bottom or buy at the top.  A buy and hold strategy allows your portfolio to participate in the long-term trend of the stock market.
  • Rebalance your accounts on an annual basis. It will force you to sell high and buy low.  This strategy will allow you to keep your asset allocation in check and reduce your risk over-time.
  • In addition to sectors, countries also move in and out of favor. In 2015 the Denmark stock market was the best performer in the world while Canada’s was last.  A year later these two countries flipped with Canada first and Denmark last.  Adding international investments to your portfolio will help reduce your risk. The chart below from Dimensional Fund Advisors highlights the performance of global markets dating back to 1997.

DFA Country

In 2018 focus on your goals and don’t worry about trying to find the hot sector.  Diversify your accounts and pay attention to your financial plan.  The stock market is in a constant state of rotation so keep your eyes fixated on the long-term horizon.

Can you hear me, Major Tom? ~ Space Odyssey, David Bowie.

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 5, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.

[1] I’m dating myself but that’s okay.

[2] Morningstar Office Hypothetical tool for fund performance and ending valuations.