Timing

Timing is everything.

Justify won the 150th running of the Belmont Stakes to capture the Triple Crown with a winning time of 2:28. If Justify had raced Secretariat in the 1973 Belmont, he would’ve lost by 4 seconds.

Carl Lewis set the world record for the 100-meter dash in 1991 with a time of 9.86 seconds. In 2009, Usain Bolt lowered his own world record to 9.58 seconds, .28 seconds faster than Lewis.[1]

Jules Verne wrote Around the World in Eighty Days in 1873. An 80-day trip in 1873 was a record. Today, the Space Shuttle can orbit the Earth in 90 minutes.

An investor who purchased the Vanguard 500 Index fund on March 9, 2009, the market low, generated an average annual return of 18.51%. His $10,000 investment is now worth $47,971. If he bought the same fund on October 1, 2007, the market top, his return fell to 7.54% per year. A $10,000 investment is now worth $21,726. He still doubled his money by investing at the top but not as impressive as if he had caught the low.

In reality, you won’t invest at the top or bottom of a market cycle. A more realistic scenario is that you’ll invest in between the two. For example, if you invested $10,000 per year from 1998 to 2018, you made 8.14% per year. Your $10,000 annual investment is now worth $547,321.

Investors seeking safety may look to the bond market. If you invested $10,000 in Vanguard’s Total Bond Fund on March 9, 2009, your average annual return was 3.59%. A $10,000 investment is now worth $13,846. Investing in this same fund on October 1, 2007, generated an average annual return of 3.80%. A $10,000 investment is now worth $14,887.

A bond fund is more stable than a stock fund, but the returns are considerably less. Despite the volatility in the stock market, it still pays to own stocks for the long run and hold them through all market conditions. If your time horizon is 3 to 5 years or more, you need to own stocks.

Time is more important than timing.

Time is on my side, yes it is. ~ The Rolling Stones

June 28, 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.

 

[1] https://www.topendsports.com/sport/athletics/record-100m.htm

A Stock Picker’s Market

The panelist on CNBC’s Halftime Report today mentioned we’re currently in a stock picker’s market. A stock picker’s market is one where money managers actively pursue strategies that will outperform the indices. They’ll try to cherry pick winners and avoid losers by employing several techniques such as charting and timing.

After the show ended, I searched Morningstar’s database looking for funds with a high turnover and a 5-year track record. What does turnover mean? A fund with a turnover of 100% will replace its entire portfolio over a 12-month period.[1] The average mutual fund has a turnover of 130%.[2] The three funds I found have an average turnover of 3,775% – that’s a lot of stock picking!

Rydex S&P 600 Pure Value Fund (RYSVX) has an annual turnover of 1,832%. The initial fee to purchase this fund is 4.75% and the ongoing expense is 1.53%. A few of the holdings are Finish Line, Barnes & Noble, and Zumiez. This fund has underperformed the S&P 500 on a 3, 5, and 10-year basis. In 2008 it dropped 43.64%. A $10,000 investment in this fund five years ago is now worth $13,662. The average annual return has been 6.43%.[3]

Salient Tactical Plus Fund (SBTAX) has an annual turnover of 3,584%. The initial fee to purchase this fund is 5.5% and the ongoing expense is 1.98%. It currently owns four investments. It has underperformed the S&P 500 on a 1, 3, and 5-year basis and it’s trailing the market in 2018. A $10,000 investment in this fund five years ago is now worth $12,016. The average annual return has been 3.74%.[4]

PSI Strategic Growth Fund (FXSAX) has an annual turnover of 5,910%. The initial fee to purchase this fund is 5.75% and the ongoing fee is 2.31%. It owns 8 investments or twice as many as Salient. It has underperformed the S&P 500 on a 1, 3, and 5-year basis. This year it’s down almost 15%. A $10,000 investment in this fund five years ago is now worth $9,225. The average annual return has been a negative 1.6% per year.[5]

By comparison, the Vanguard 500 Index Fund (VFINX) has an annual turnover of just 3%. It doesn’t have a sales charge and the ongoing fee is .14%. It has generated market returns since 1976, minus its miniscule fee. A $10,000 investment in this fund five years ago is now worth $18,274. It has generated an average annual return of 12.82% per year.[6]

I hope we’re not in a stock picker’s market if these funds are an indication of one. Funds with high turnover and excessive fees should be avoided at all costs. Instead, look for mutual funds that generate market returns such as the Vanguard 500 Index Fund.

Investors regularly try to outperform the market by utilizing tools, tricks, and trading only to fall short time and time again. Rather than trying to find a market beating strategy focus on your financial plan and invest in low-cost mutual funds. It’s okay to grow rich slowly.

Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson

June 22, 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.

[1] https://www.investopedia.com/articles/mutualfund/09/mutual-fund-turnover-rate.asp, Stephan Abraham, April 23,2018.

[2] Ibid

[3] Morningstar Office Hypothetical Tool

[4] Ibid

[5] Ibid

[6] Ibid

Frozen TV Dinners

Americans dined on TV dinners from Swanson’s during the ‘60s and ‘70s. Parked in front of a TV while eating a balanced meal on a wobbly TV tray was quick, convenient and efficient. These pre-packaged meals freed up time in the kitchen, so families could spend some “quality” time together while watching Mary Tyler Moore, Happy Days, or Bonanza. The days of making dinner from scratch were declining with the arrival of frozen dinners and the microwave.

The internet age has allowed companies like Grubhub and Blue Apron to thrive by delivering food to our doorstep. Grubhub will bring you a meal from your favorite restaurant whether you’re buying a sandwich or several entrees. Blue Apron will deliver fresh ingredients, so you can prepare and cook your items when it’s fitting for your schedule.

Of course, you can still make home-made meals by shopping for your favorite items and cooking them to your liking. You can choose from thousands of ingredients as you roam the aisles of your local supermarket. Cooking your own meals is rewarding especially if you have the time and desire.

Mutual funds are packaged products allowing you to own thousands of individual securities with the purchase of a few funds. The fund manager will do the “cooking” for you so you don’t have to worry about the ingredients, the only thing you must do is decide which funds are best suited for your situation. A Certified Financial Planner® can help you find the right mix of assets to help you reach your goals.

Over the past twelve months there have been 755 companies that generated a return of 25% or more. A few of the companies in this group include AeroVironment, Hexcel, Match Group, and Zoetis. If you bought 100 shares of each of the 755 companies, it would’ve cost $6.7 million. Jim Cramer recommends allocating an hour per week of research for each company you own, which, in this case, isn’t mathematically possible.

Finding the right investment ingredients to generate positive returns can be tough.  In 2017, about 9% of the companies on this list had a negative return; in 2016, 26% of the companies were in the red. In 2008, 327 of the companies were down 25% or more.  Several of these 2008 losers turned into winners a few years later but I doubt investors stayed the course to enjoy the good times. For example, Crocs was down 96% in 2008 while year-to-date it’s up 47%; over the past 10 years it has generated an average annual return of 7.21%.[1]

A better alternative for most investors is to purchase low-cost mutual funds diversified throughout the world.  By holding a basket of five mutual funds you’d own more than 13,500 companies. The following five mutual funds managed by Dimensional Funds generated a one-year return of 16.51%. The five-year average was 11.57%.[2] More importantly, this portfolio will allow you to live your life without trying to find the right stock at the right time. Here are the funds:

DFSCX: DFA US Micro Cap Portfolio.

DUSLX: DFA US Large Cap Growth Portfolio

DFSTX: DFA US Small Cap Portfolio

DISMX: DFA International Small Cap Portfolio

DFIEX: DFA International Core

As you create your investment portfolio, look to mutual funds to achieve your goals. A financial plan is your recipe and the funds are the ingredients. Your plan and portfolio will be based on your financial goals and dreams. Furthermore, it will allow you to focus on more important things you enjoy doing like cooking.

Bon Appetite!

Life itself is the proper binge. ~ Julia Child

June 18, 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.

 

 

[1] Morningstar Office Hypothetical Tool

[2] Ibid

You Can’t Keep A Good Asset Down!

Investors wrenched $227 billion from equity mutual funds from July 2015 to January 2016 before the Dow Jones Industrial Average climbed 54%.  In January 2018 investors poured $39 billion into equity mutual funds before the Dow Jones fell 12.25%[1]

This behavior isn’t limited to the market as investors move money in and out of sectors based on their emotional barometer.  Through September 2017, individuals added $115 billion to funds in the intermediate-term bond sector, at the peak. Since then, it has fallen 7%.  At the same time, they withdrew $69 billion from US large-cap growth funds before this sector rose 20%.[2]

I understand wanting to be invested during the good times, and out at the bad times but timing the market is a waste of time and it can’t be done. Greed and fear drives short term trading, and this usually doesn’t end well for investors.

Since World War II, there have been seven bear markets defined as a drop of 20% or more. The average pullback has been 34.5%, lasting 14 months and a recovery time of 26 months. However, the average expansion lasted 83 months or six times as long as the typical correction. The average total return during the expansion phase was 268%![3]

It’s clear from the data that it makes little sense to time the market. Investors who try probably lose more money than if they stayed fully invested through a correction.

Here are several ways to protect yourself from trading on emotion.

  1. A diversified portfolio of low-cost mutual funds will allow you to participate in all markets -domestic and foreign. It will also give you access to several asset classes like stocks, bonds and cash. It won’t guarantee a positive return during a bear market, but it will help cushion the blow. For example, when the stock market fell 37% in 2008, long-term bonds rose 25.9%.[4]
  2. Rebalancing your portfolio annually will keep your asset allocation and risk tolerance intact. When you rebalance your portfolio, the model will sell assets that are richly valued, and buy those that are undervalued. The best time to rebalance is in January after all your dividends, interest payments, and capital gains from the previous year have been credited to your account.
  3. If you’re concerned about a stock market correction, keep two to three years’ worth of expenses in cash. If your annual expenses are $50,000, then a cash balance of $100,000 to $150,000 is recommended.  As a reminder, the average bear market has lasted 14 months so your cash balance will allow you access to your money during a correction while waiting for your other investments to recover.
  4. A financial plan will align your financial goals to your investment portfolio. If your plan, portfolio, and risk tolerance are in sync, then you’re more likely to stay invested for the long-term.
  5. Work with a Certified Financial Planner™ who is a registered investment advisor. Working with a trusted professional will give you peace of mind because they’ll be intimately aware of your personal and financial situation. During times of market duress, it helps to have a confidant you can call and discuss the issues of the day. Furthermore, a study by Vanguard found that an advisor relationship can add +3% in net returns.[5]

Markets have been gyrating for centuries and the next few hundred years won’t be any different so don’t let short-term moves derail your long-term goals. Rather than worrying about the direction of the market allocate more of your time to refining your goals, it will bear more fruit.

A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be. Wayne Gretzky

June 12, 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.

[1] https://ycharts.com/indicators/long_term_mutual_fund_flows

[2] Morningstar Direct℠ Asset Flows Commentary: United States. 10/13/2017, Alina Lamy, Senior Analyst, Quantitative Research

[3] Morningstar® Markets Observer, Q4 2017, Data as of 9/30/2017, Morningstar Research Team.

[4] Dimensional Matrix Book 2018

[5] https://www.vanguard.com/pdf/ISGQVAA.pdf

What is Asset Class Investing?

Investors can invest for growth, income or preservation. The three asset classes that fit this bill are stocks, bonds and cash – stocks for growth, bonds for income, and cash for preservation. Since 1926, stocks have returned 10.2%, bonds 5.5%, and cash 3.4%. Inflation during this same time frame has averaged 2.9%.

Stocks can be further subdivided into large, small, or international companies. Bonds can be issued by governments, municipalities, or corporations. Each of these asset classes have their own unique qualities and characteristics.

Active money managers will try outperforming a benchmark by selecting investments they deem superior to the general population. In addition, they’ll try to time their trading based on market and economic conditions.  Some market watchers categorize active money management as aggressive or speculative.  This style of money management is expensive as they tend to trade more often and employ analyst, traders, and other support staff. It’s also well documented that most active fund managers fail to outperform their corresponding benchmark or index.

Passive money managers purchase the underlying index regardless of valuation or external forces.  An index manager won’t try to time the market and will hold their securities through all types of market conditions and cycles. The most popular index is the Standard & Poor’s 500 and since 1926 it has generated an average annual return of 10.2%. Managers who follow this index will own all 500 stocks and when Standard & Poor’s makes an adjustment to their index, fund managers will alter their portfolio accordingly. This investment strategy is rigid and doesn’t allow for much flexibility because the fund managers can’t afford to deviate from the index, also known as tracking error.  Since there is little trading and no need for a large internal research team, the fees are low.

Asset class investing is based on academic research and it allows for more flexibility than the other strategies. Like passive investing, the fees are low, and diversification is high. Since trading is flexible, it’s more tax efficient than the active management style.

Dimensional Fund Advisors applies factors to their asset class investing.[1] This strategy is based on the findings and research of Eugene F. Fama and Kenneth R. French.[2] The outperformance of the Fama-French factors is over time and they are as follows:

  1. Equity premium: Stocks outperform bonds.
  2. Small cap premium: Small companies outperform large companies.
  3. Value premium: Value stocks outperform growth stocks.
  4. Profitability premium: High profitability companies outperform low profitability ones.
  5. Term premium: Longer term bonds outperform shorter term bonds.
  6. Credit premium: Lower credit bonds outperform higher credit bonds.

Allocating your dollars across several asset classes is what makes this strategy popular. The chart below is often referred to as a financial periodical chart, skittles chart, or quilt and this one is provided by Ben Carlson at a Wealth of Common Sense.[3] As you can see, asset classes aren’t static, and they fluctuate often. For example, if you follow the emerging market sector in the yellow box, you’ll notice it’s either near the top or the bottom. In 2017 it was the top performing sector gaining 37.3% while this year it’s near the bottom with a loss of 1.57%.

Investors who don’t adhere to an asset class investing style get frustrated with underperforming sectors and sell them at, or near, the bottom before they rebound. Small cap stocks underperformed in 2014 and 2015 before claiming the top spot in 2016. Likewise, investors will chase returns by pouring money into the hot sector usually before it rolls over like they did with commodities in 2009 and 2010.

A friend of mine who works for one of the largest mutual fund companies in the world told me the unwritten rule for his firm is for employees to invest their bonuses in the worst performing equity fund they manage from the prior year because they know it will eventually rebound.

I, too, like allocating dollars to underperforming sectors because they’ll eventually return to favor. Another advantage of buying a down and out sector is that you’ll buy in at bargain prices, a classic buy low and sell high scenario. An unloved sector also offers tremendous value to the buy and hold investor.

 

 

In a model driven portfolio that diversifies dollars across several asset classes, you can take advantage of down and out sectors by rebalancing your account annually. When it rebalances, the model will sell overpriced assets and buy underpriced ones. This strategy will keep your original asset allocation and risk tolerance intact.

A model driven, asset class portfolio offers many benefits. You get access to thousands of securities across the globe buy owning low-cost, efficient mutual funds. Furthermore, you no longer must stress about finding the right stock at the right time, nor do you have to fret about market timing.  What could be better than a stress free, low-cost, model driven portfolio?

June 11, 2018

Barbecue may not be the road to world peace, but it’s a start. Anthony Bourdain

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.

[1] Dimensional Fund Advisors – Dimensions of Returns.

[2] https://www8.gsb.columbia.edu/programs/sites/programs/files/finance/Finance%20Seminar/spring%202014/ken%20french.pdf, Eugene Fama and Kenneth French, March 2014.

[3] http://awealthofcommonsense.com/2018/01/updating-my-favorite-performance-chart-for-2017/, Ben Carlson, 1/14/2018.

Remember the Potentiometer!

During college, my friends and I figured out how to get rich. We were going to purchase assets at 50 cents on the dollar and then sell them for $1. We attended auctions to bid on items like office furniture and filing cabinets at discounted prices. The challenge, however, was everybody else in the room was doing the same thing.

At our first, and last, auction we bought potentiometers, a product I had never heard of before in my life. What is a potentiometer? It’s an instrument for measuring electromotive forces also known as a voltage divider.[1] In addition to not knowing what they were no one else was bidding on them – a bad sign for sure. We bought something no one wanted, and we had no idea what it did.  The boxes and packaging did look cool, though. To be fair to my partners, it was my idea to make the purchase.

We visited several electronic shops, but we couldn’t find any takers. It was clear we were going to lose money on our new venture. The investment was minimal but the knowledge I gained from the ordeal was invaluable.

I learned several business and life lessons from the potentiometer. “Remember the potentiometer” became a rallying cry.

The first thing I learned was to only buy things I understood. If I couldn’t explain it to others, then I had no business in buying it for myself.  A simple solution often works best.

Don’t try to get rich quick. We were looking to make a quick hit, with minimal work. The fastest way to lose money is to try to make it quickly. Get rich quick scams are built on hype and weak foundations. Rather, it’s better to build your wealth slowly, over time, based on solid investment principles.

Price and value are two different things. As Warren Buffett said, “Price is what you pay, value is what you get.” Price is relative, of course, but it shouldn’t be the primary focus when making investment decisions. Value is a better indicator. For example, the price of Berkshire Hathaway is $282,724 per share. On the surface it appears expensive, but it offers a better value than a company like Coffee Holding priced at $4.27. At the auction, we passed on higher priced items because we thought we could make more money from the lower priced ones. The rolling tool cabinets were priced high, but they were selling well.

Cut your losses quickly. We invested cash and then tried to recoup our cost by selling them at higher prices. We spent hours driving around San Diego visiting stores to try and sell our goods. After a few meetings I realized they weren’t going to sell, but we forged on any way. We should’ve thrown them a way and then focused our efforts to make better purchases. Instead, we channeled our energy on more ways to sell our losing inventory.

Learn from your mistakes. If you’re stuck in a losing investment, cut your losses and move on. It would be nice to make money on every trade, but this isn’t possible. If you invest in several securities, you’ll experience losses. Once sold, spend time on reviewing your trade to try and find clues as to why it didn’t work out and then try not to repeat the same mistake again.

As my career progressed, I’ve often thought about the potentiometer purchase. You probably have your own losing investment story so rather than worry about the money lost focus on the knowledge gained.

“It’s pretty easy to get well-to-do slowly. But it’s not easy to get rich quick.” ~ Warren Buffett

June 7, 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.

[1] Merriam-Webster Dictionary

The Third Rail

The Social Security Administration recently announced they’ll dip into their reserves to make ends meet because costs are exceeding income. The last time this happened was in 1982.  According to a Wall Street Journal article this is three years sooner than expected.[1] The article also mentions the trust fund will be depleted in 2034 and Medicare’s hospital insurance fund will run dry in 2026.[2] The reasons highlighted for this shortfall are the aging population and a lack of revenue from the labor force.[3] The trustees are forecasting a reduction in benefits by 25% if the trust fund assets are depleted.[4]

Social Security and Medicare are entitlements long considered untouchable as politicians don’t want to carve into these programs, but something needs to be done. In my opinion, the trustees could incorporate a few strategies to preserve the assets, none of them good. They could apply means testing to your benefit so if you’ve been blessed with the ability to earn income and save money, then the government could reduce your benefit and give the surplus to your neighbors who’ve spent lavishly for years. The current age range for receiving benefits falls between the ages of 62 and 70. This range can be increased to the ages of 65 to 75, for example. Last, the government will need to raise taxes to pay for future benefits.

As I mentioned, these options aren’t good so what can you do today to protect yourself from a reduction in benefits?

  1. Plan. A financial plan will quantify your hopes, dreams and fears and give you an estimate of your future spending and retirement assets with or without Social Security. I’ve completed several plans for millennials and a few of them have requested to run their retirement projections without Social Security because they don’t have faith in our government to provide this benefit.
  2. Save more money. The more money you save today means more money in your pocket tomorrow. If you have access to a company retirement plan, maximize your contributions. You can contribute $18,500 if you’re under age 50, $24,500 if you’re older. You can also contribute to an IRA, regardless of your income. The maximum contribution is $5,500 for individuals under the age of 50, $6,500 if you’re older. In addition, depositing money into a brokerage account is recommended. If you can save an additional $500 per month, it may be worth more than $600,000 at the end of 30 years.[5]
  3. Invest in stocks. The long-term trend of the stock market will allow you to increase your wealth and potentially offset the short fall from Social Security. According to Dimensional Fund Advisors, $1 invested in the S&P 500 grew to $7,347 from 1926 to 2017. By comparison, $1 invested in long-term government bonds grew to $143.[6]
  4. Invest in small stocks. Small-cap stocks have outperformed large company stocks by a wide margin. $1 invested in small stocks in 1928 is now worth $30,560.[7]
  5. Reduce your expenses. Are there items in your budget you can reduce or eliminate? Can you reduce your spending and increase your savings? The lower your expenses, the less assets you’ll need at retirement. Let’s say your annual expenses are $100,000. At $100,000, you’ll need assets of $2.5 million to cover your cost of living. If you can reduce your expenses to $75,000, then the asset level drops to $1.875 million, a difference of $625,000.

Social Security has been a third rail for decades and this time is no different. Our government has kicked this can down the road for generations, so our children will inherit this problem.

Take control of your financial future so you can enjoy your retirement. It’s imperative that you start saving and planning today, so you don’t let the government dictate your retirement lifestyle – you’re entitled to it!

The most terrifying words in the English language are: I’m from the government and I’m here to help. ~ Ronald Reagan

June 6, 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. Photo Credit: Andrius Kaziliunas.

[1] https://www.wsj.com/articles/social-security-expected-to-dip-into-its-reserves-this-year-1528223245, by David Harrison, June 5, 2018

[2] Ibid

[3] Ibid

[4] https://www.wsj.com/articles/social-security-and-medicare-face-depletion-within-17-years-trustees-say-1499973205?mod=article_inline, by Josh Zumbrun, July 13, 2017

[5] FV calculation: $500 per month for 30 years at 7%.

[6] Dimensional Fund Advisors Matrix Book 2018

[7] Ibid

Charlie and the Chocolate Factory

In Roald Dahl’s great book, Charlie and the Chocolate Factory, people around the world are in a feeding frenzy eating their way through Wonka Bars in hopes of finding a Golden Ticket. A holder of a Golden Ticket will get access to Wonka’s Factory to experience the inner workings of his mysterious operation and receive a lifetime supply of chocolate.

Emotions quickly take over and people act irrationally as they hunt for one of the five tickets. Some individuals go as far as ordering boxes by the truckload. People offer outrageous sums of money for the last ticket once it’s discovered.

Investors often act irrationally during periods of greed and fear. When greed takes over, investors abandon their investment plan and aggressively pursue high flying stocks like they did during the dot com phase in 1999 or the recent bitcoin craze.

Speaking of greed, Augustus Gloop, Veruca Salt, Violet Beauregarde, and Mike Teevee were tempted by the luscious candy treats. These four were impatient and couldn’t control their impulses. As a result, they were whisked away by pipes or teleported to some other location as Oompa Loompas sang in the background.

Fear is present in the movie during the boat ride through the tunnel of terror.  Wonka appears to be driving the boat at excessive speeds scaring his passengers in the process.  All the while, Wonka is in control. It’s not possible to control the stock market, of course, but you can increase your odds of success by working with a Certified Financial Planner and completing a financial plan.

Gripped by fear, investors sell their stocks at the worst possible time. During the month of May U.S. equity funds had outflows of $16.3 billion[1] despite positive returns from most of the major indices. Investors reacted to headline news on Italy, North Korea, and interest rates by yanking billions of dollars from the stock market.

Investors fear market corrections and loss of principal. As a result, they’ll sell investments too early or try to time the market before a correction arrives. These short-term actions can create long-term problems to your wealth.  According to the Motely Fool, the odds of losing money in the S&P 500 for one day is about 53%, over 20 years it’s 0%.

Investors often get impatient when their portfolio is not delivering immediate results. A diversified portfolio of mutual funds will have varying degrees of short-term success. So far in 2018, aggressive investments like growth or technology are performing well, while bonds are not. Investors focusing on the laggards will want to sell these holdings to chase the returns of their better performing funds. This might appear rational but it’s not. If you constantly chase the best performing sector by selling your laggards, you’ll most likely end up with a losing proposition a year or two later. For example, investors who sold underperforming emerging market funds in 2013, 2014, and 2015 missed out on stellar returns in 2016 and 2017.

After two attempts Charlie finds the fifth Golden Ticket in a Wonka Bar. He was able to purchase it after finding a coin in the sewer. He and Grandpa Joe are invited to join the tour. They mostly follow the rules and end up winning the contest when Charlie returns his everlasting Gobstopper. Charlie not only receives a lifetime supply of chocolate, but he’ll become the heir apparent to Willie Wonka. His patience was rewarded.

The patient investor is also rewarded over time. If an investor can ignore the daily gyrations in the stock market, she’ll be rewarded by its powerful compounding. If she invested $10,000 in the Vanguard S&P 500 fund on May 31, 1976 and held it through this past May, she would’ve enjoyed an average annual return of 11.5%. Her original $10,000 investment is now worth $786,302.[2]  During the forty-year run, the market experienced several wild rotations including Black Monday, October 19, 1987, when it crashed 22%. She also endured the Tech Wreck from 2000 to 2002 when it dropped 43%. Last, it fell 37% during the Great Recession. However, since she held on through these minor disruptions she experienced outsized gains and a large account balance.

The markets will rise and fall for the foreseeable future so it’s imperative for successful investors to check their emotions at the door, follow their financial plan, and hold on for the long haul. If you can do this, you’ll be rewarded with your personal Golden Ticket!

“It’s the fifth Golden Ticket, Mother, and I’ve found it!” ~ Charlie Bucket

June 3, 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.

 

 

[1] https://www.ici.org/research/stats/flows/ltflows/flows_05_30_18

[2] Morningstar Office Hypothetical Tool. May 31,1976 to May 31,2018. The return is before taxes and fees are deducted.