Month: November 2018

Forever Is A Long Time

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Financial planning is important, but life planning is better. A financial plan indicates a finite service, a one-time event. Life planning takes financial planning to a higher level. It’s enduring, vibrant, and active. It’s proactive. It’s forever, and forever is a long time!

I’ve run several marathons, and I always envision myself finishing the race before I start training. It motivates me to continue running on cold winter days. My training will cover several months in order to build up my endurance to run 26.2 miles. On race day I never focus on the daunting task of running the entire marathon. I take it a step at a time, a mile at a time and eventually I’ll arrive at the finish line.

Life planning is like running a marathon. However, in life, you’ll have multiple goals all competing simultaneously. When my daughter was born, I had two conflicting goals: paying for college and saving for retirement. In addition, I had to pay my mortgage and the other household expenses. I didn’t have the luxury to choose one over the other.

Setting goals and timelines is paramount in life planning. Writing your goals down and committing them to paper will give you an opportunity to succeed.

In a famous study, The Harvard MBA Class of 1979 was asked about their goals. Only 3% of the graduating class had written goals.  Ten years later the graduates were interviewed again. The group with written goals had ten times the wealth of the remaining 97% – combined![1] Goals matter.

Financial planning is great until life gets in the way and then you must do what you can. How do you choose the life goal that’s most important? How do you prioritize them? Are short-term goals more important than long-term goals?

If you’re fortunate to live a long life, you’ll pass through several stages – each one exciting in its own way.  I’m sure if you looked back over your life you can identify several memorable moments that have shaped who you are today.

So, how do you approach life planning? Here are a few suggestions.

  • Take an inventory of your current situation. What resources do you have? Where’s your money going? How is it being spent? What are your short-term needs?
  • Write down your goals. Document your dreams. Journal your thoughts. Don’t worry about your current situation when you start this exercise. President Kennedy didn’t have the resources or knowledge to put a man on a moon, but his vision and optimism drove others to make it happen.
  • Monitor your progress. Check off items from your list after you’ve reached a goal. As you move through your life stages, set new ones. My daughter’s education is funded, so I’m adding new goals to my list.
  • Eliminate goals that are no longer important to you or your family. When I was young, I wanted a Porsche, but now that I’m older it’s no longer a goal. My cousin had a Porsche and he let me drive it often. I was able to test drive my goal before I decided to let it go. Eliminating goals is just as important as establishing new ones.
  • Review your past goals. How did they turn out? What can you learn from your successes or failures? Can your past direct you to better opportunities or help you from repeating previous mistakes? Pause, rest and reflect on where you’ve been. Climbing a mountain takes time. After you reach the peak, look around and enjoy the beauty of achieving your goal. Take solace in your journey.
  • Keep your eyes on the horizon and don’t let obstacles get in your way. Of course, there will be hardships, but if you stay focused on your written goals you’ll eventually arrive at your destination.
  • Don’t go solo. If you’re married, you and your spouse can work on your goals together. Family goals are just as important as personal ones. If you’re single, share your goals with a friend or trusted advisor. Accountability is helpful.
  • Give thanks. On your life journey you’ll encounter several people who need a little extra help. Stop and give them a hand. You’ll be glad you did.

Life planning is perpetual. It’s forever. Let your written goals motivate you to live life on your terms.

In their heart’s humans plan their course, but the Lord establishes their steps. ~ Proverbs 16:9

November 30, 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 to help our clients pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] http://www.lifemastering.com/en/harvard_school.html

Do You Have the Right Map?

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Having the right map is paramount if you want to arrive at your destination. Navigating the high seas and distant lands requires a detailed map, so does driving across town to pick up a gallon of milk. A map of Los Angeles is of little use in New York. A ski map of Crested Butte provides no guidance on Mt. Bachelor. Whether you rely on a printed map or satellite GPS, make sure it’s in sync with your travel plans.

Growing up in Los Angeles I relied on Thomas Brothers Maps to help me get around town. The maps, bound by a spiral spine, were necessities for driving around Los Angeles and the surrounding counties. The maps were detailed, simple to use, and extremely efficient.

When I hike in the mountains, I mostly rely on trail maps from National Geographic. Never would I consider hiking in a national forest without one. Would you?

Nowadays, satellite navigation through phones, watches, and other electronic devices have replaced the need to carry a printed map unless travelling in remote areas with poor reception.

Have you ever been lost? Driven on the wrong road? Hiked on the wrong trail? It’s a scary feeling once you realize you may be lost. Anxiety runs high until you recognize a familiar landmark.

Having the right financial map can help you navigate your investments. Like a GPS, your financial map can guide you to your desired destination. Your map is a financial plan. It will help you identify your goals and direct you to the best path to achieve them. However, most investors don’t follow a plan, or if they do it’s the wrong one.

Here are a few suggestions to help you follow the right financial map.

The right way:

Your map should be a collection of your goals – no one else’s. Committing your financial goals and dreams to paper gives you an excellent chance of making them come true. Your goals, once documented, become a gravitational pull, navigating you to your destination. In addition, after you write down your goals, you can quantify the time and cost it will take to achieve them.

Your map will help you avoid the wrong roads and trails, keeping you focused on your route. A financial plan will help you answer several questions like, “Can I afford to retire?” or “Do I need to be worried about the market volatility?” It may also help you avoid financial landmines like Bitcoin.

Your map should be checked periodically. After you have departed on your financial journey, check in often to make sure you’re still on the right path. I refer to my hiking map often to make sure I’m still on the right trail. If I have deviated from my goal, I must find the fastest, and safest, route to get back on track. Your financial plan will occasionally be knocked off track through markets rising and falling. Adjusting your plan and portfolio is necessary for you to achieve your goals.

The wrong way:

Following someone else’s map will never get you to your financial destination. Trying to keep up with your next-door neighbor is no way to plan for the future. Who cares if they have a bigger boat or a faster car? Are you jealous of their social media posts? Planning through envy is a sure way to end up in the poor house.

Listening to the media. The media’s job is to report on the news and entertain their audience.  They’re not talking directly to you, nor are they giving you specific investment advice. When a reporter says the market is going to rise or fall, they’re making a generalization about its direction.  They don’t know you or your situation. If you listen to the news, do so with a skeptical ear.

Leaving your financial future to hope and chance. Hoping you have enough money to retire someday is no plan. A vague promise of a bright future will insure you won’t have one.

A financial plan will require some time and effort on your part, but the results will be time well spent. Once it’s complete, you’ll be able to refer to it often and adjust it as needed. It will keep you focused on your final financial destination.

Happy trails!

“Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?” ~ Luke 14:28

November 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.

 

 

 

Cash is King!

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Cash is King! The King is Dead! Long live the King! An unusual thing is happening this year – cash is outperforming stocks and bonds. Allocating your investments to T-Bills has been a winning trade this year.

According to Deutsche Bank, 90% of the 70 asset classes they track are in negative territory for the year. As a comparison, last year only 1% of assets generated negative returns.[1]

U.S. T-Bills, or cash, rarely outperform stocks and bonds. In fact, it has only happened 8 times in the last 92 years. The last year was 1994.[2]

Treasury Bills are a safe investment, probably the safest.  Since 1926 they have never lost money – a rare feat for an investment. If they’re so safe and have never lost money, why not allocate 100% of your assets to this category? Great question. A major reason is inflation. Inflation has all but wiped out your realized return. T-Bills have historically averaged 3.4% and inflation has averaged 2.9%. Your net return, before taxes, has been .5%. If you subtract taxes, your return is negative.[3]

In 1974, T-Bills generated a return of 8%, but the inflation rate was 12.2% – a real loss of 4.2%.[4]

Cash is part of the asset allocation pie of stocks, bonds and cash. All three components are needed for you to achieve long-term investment success.

Cash may provide temporary comfort during a stock market downdraft, but it’s not a long-term solution to creating wealth. Of course, if you need money in the next year or two, then an allocation to cash make sense. For example, if you’re going to buy a new home next year, then a high cash reserve is needed.

A recent client transferred money from their CD to their investment account, a diversified portfolio with several asset classes. Her diversified portfolio is in negative territory so far. She asked me a few weeks ago if she would’ve been better off keeping her money in the CD, and I told her yes, it would have been the better strategy. Hindsight is 20/20.

Stocks aren’t performing well this year looking to break a nine-year winning streak. Stocks never appreciate in a straight line, unfortunately. A jagged chart of stocks is the norm. High points and low ones dot the landscape.

How should you allocate your assets between stocks, bonds and cash? The best way to determine your allocation is to complete a financial plan. Your plan will give you guidance on how to best invest your resources.

When should you allocate more resources to cash? If you need money, then keep it in cash – money market funds, CDs or T-Bills. If you’re approaching retirement, then my recommendation is for you to allocate three-years’ worth of expenses to cash. For example, if your annual expenses are $100,000, then a cash allocation of $300,000 is suggested. Last, if you can’t sleep at night because you’re worried about stocks falling further, then raise enough cash so that you can make it through the night.

If your time horizon is more than five years, invest in stocks and bonds.  Despite their sporadic returns, they historically generate higher returns than cash.

For we walk by faith, not by sight. ~ 2 Corinthians 5:7

November 26, 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.wsj.com/articles/no-refuge-for-investors-as-2018-rout-sends-stocks-bonds-oil-lower-1543155033, Akane Otani and Michael Wursthorn, 11/25/2018

[2] Ibbotson® SBBI® 2015 Classic Yearbook

[3] Dimensional Fund Advisors 2018 Matrix Book

[4] Ibbotson® SBBI® 2015 Classic Yearbook

Rates Have Risen

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When interest rates start to rise, stocks will fall. Not only will they fall but our economy will tumble into a recession. Corporate credit will evaporate. Home ownership will cease. All dire consequences.

It’s true, rising interest rates do cause economic headwinds. But rates have been rising. In fact, they’ve risen a lot over the past couple of years.

Since July 2016, the yields on the 1-Month, 2-Year, 10-Year, and 30-Year Treasuries have risen substantially. The 1-Month T-Bill yield has risen 2,490%, the 2-Year yield has soared 384%, the 10-Year yield has climbed 135%, and the 30-Year yield has jumped 28%. Despite these rate spikes, the S&P 500 has gained 24% over the same time span.[1]

In addition to large cap stocks rising, small cap stocks have gained 30%, international stocks are up 12.56%, and emerging markets have added 10%. Not everything has risen during this two-year window. Bonds have dropped 8% and real estate investment trusts (REITs) are down 13%. An equally weighted portfolio across these six asset classes would have generated an average annual return of 9.3%.

Interest rates have been rising and falling for centuries. Below are a few substantial interest rates spikes for the yield on the 10-Year U.S. Treasury.

1983 to 1984 = 35%.

1987 = 46%.

1993 to 1994 = 57%.

1998 to 2000 = 58%.

2003 = 52%.

2008 to 2009 = 62%.

2012 to 2013 = 104%.

The average increase in yield for the 10-Year U.S. Treasury during these selected time periods was 59%. For the past 56 years the yield on the 10-Year has averaged 6.19%.[2]

If you purchased the S&P 500 in 1983, you would’ve made 1,511% – before dividends! Had you purchased stocks before any of the previous rate spikes, you’d still have significant stock gains today.

It’s hard to imagine our rates rising substantially from here, especially when other countries have much lower interest rates. When compared to other countries, our 10-year Treasury yield is substantially higher. France’s rate is .76%, Germany’s is .38%, the U.K.’s is 1.25%, and Japan’s is .09%. Australia has a comparable rate at 2.7%.[3]

Let’s look at other metrics to see if there is a case for higher interest rates.

The current unemployment rate is 3.7% which means 96.3% of Americans are working. Workers spend money – a positive for our economy.

64% of Americans own their own home. This rate has been consistent for the past 20 years.

Our current inflation rate is 2.1%, less than it was in 2008. The 91-year average for inflation has been 2.9%.

The current growth rate for the Gross Domestic Product (GDP) is 3.5%. The 71-year average GDP growth rate has been 3.2%.

West Texas Intermediate (WTI) Crude Oil is currently trading at $51.31 per barrel, down 33% from its peak in July. The average price for WTI for the past 32 years has been $43.75.

The Tax Cuts and Jobs Act lowered the corporate tax rate from 35% to 21%. Our tax rate was once the highest among developed nations, now it’s about average.[4]

Headline risk may keep a lid on the stock market in the near term, but the metrics for our economy look positive. Trying to time the stock market, or any market, based on one or two data points is futile. Anticipating the market’s direction is a loser’s game. Rather than playing the guessing game, focus on your financial goals and purchase a diversified portfolio of mutual funds so you can take advantage of the long-term trend of global markets.

Let the wise listen and add to their learning, and let the discerning get guidance. ~ Proverbs 1:5

November 23, 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://fred.stlouisfed.org/

[2] Ibid

[3] http://www.wsj.com/mdc/public/page/mdc_bonds.html?refresh=on

[4] https://taxfoundation.org/us-corporate-income-tax-more-competitive/, Kyle Pomerleau, 2/12/2018

A Few Things I Know

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Most markets have struggled during the months of October and November causing angst and worry among investors. Media commentators, reporters, and online personalities are bellowing from their pulpits about the pending doom in the markets and economy. If these experts were asked to help contain a fire, they’d bring kerosene. It’s easy to focus on negative items especially when investments are losing ground. Misery loves company.

Rather than focusing on the unknown and worrying about tomorrow, spend time identifying things you know and can control. With that said, here a few things I know and one I don’t.

The things I know:

  • Individuals who complete a financial plan have three times the assets of those individuals who do little or no planning.[1]
  • Stocks outperform bonds. The 91-year average annual return for common stocks has been 10.2% while long-term government bonds returned 5.5%. A $1 investment in large company stocks is now worth $7,347 while $1 invested in bonds is worth $143.[2]
  • Small company stocks outperform large company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.4% from 1928 to 2017. A $1 investment is now worth $83,387. The Dimensional Large Cap Value Index averaged 11.3%. A $1 investment in this large cap index is now worth $15,699.[3]
  • Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% is attributed to market timing and investment selection.[4]
  • Passive index investing is better than active stock picking. The Standard & Poor’s study of passive v. active reveals that over a 15-year period 95% of active fund managers fail to outperform their benchmark. This is also the case for 1, 3, 5 and 10 years.[5]
  • Lower fees are better than higher fees. Less is more.
  • Working with an investment advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[6] An advisor can help with financial planning, estate planning, investment planning, charitable planning, and much more.
  • Stocks fluctuate. But the S&P 500 has made money 73% of the time dating back to 1926.
  • Risk and reward are linked.
  • A buy and hold model of low-cost mutual funds is difficult to beat over time regardless of market conditions.
  • Spending less money than you earn will help you create generational wealth.
  • A high debt level will suffocate your ability to save money and enjoy life.
  • Giving money to those in need makes economic and spiritual sense. It will also make you happier.
  • Health is wealth. Take care of yourself.

One thing I don’t know:

  • The future.

In a few weeks we’ll roll into a new year. As we approach 2019, focus on those things you can control like saving, spending and expenses. Think long-term. Create a financial plan. Set some goals. Dream big. Smile always. Enjoy life.

“No! Marty! We’ve already agreed that having information about the future can be extremely dangerous. Even if your intentions are good, it can backfire drastically!” ~ Dr. Emmett Brown (Back to the Future)

November 21, 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] http://www.nber.org/papers/w17078

[2] Dimensional Funds 2016 Matrix Book.

[3] Ibid.

[4] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.

[5] https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

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

Too Good to Be True

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The Wall Street Journal reported on a firm that went belly-up due to “bad bets on energy prices.” The firm, OptionSellers.com, sold options on future contracts and they suffered a “catastrophic loss” on their trading strategy.[1]

As a result of the firm’s trading losses, some of their clients lost 100% of their capital and they were still required to add money to their account because their accounts went negative. One individual in the article had $470,000 invested but is now $150,000 in debt.[2]

Investors were attracted to the firm’s “double-digit gains” and income from selling options. It appears the firm sold naked calls, or short calls, against energy positions. When you sell a naked call, you don’t own the underlying asset – the most aggressive option strategy you can employ. For example, if you sell a call option against Apple at $150 per share and it rises to $200, you’re required to sell your shares at $150 and buy them at $200. In this example, you lost $50 per share minus the tiny income you received from selling a call option.

Unfortunately, greed and envy are two magnets some investors can’t ignore. The lure of double-digit returns is too much for individuals to overlook. Envy of what others are doing is a catalyst for investors to do dumb things with their hard-earned dollars.

High risk, highly leveraged strategies work in a raging bull market but when stocks fall risk in these portfolios is exposed. As investors in this firm found out it was too late for them to recover their assets. Everything works until it doesn’t. Too much risk can vaporize your wealth – quickly.

During the Tech Wreck from 2000 – 2002, I managed a branch office for a major Wall Street firm. One of our brokers worked with a client who aggressively traded options. When the stock market corrected, his client lost 100% of the account balance. Due to his margin balance, he still owed $20,000 after his account was liquidated. I called his client to let him know his account went negative and that he still owed the firm a balance. He was cooperative because he knew the level of risk he was taking. Thankfully, he sent us the money.

A globally diversified portfolio of mutual funds is boring, very boring, when compared to an exotic trading strategy using options and futures. A portfolio of mutual funds is like a slow moving, meandering river snaking its way across the country. The river is in no hurry to get to where it’s going but it will eventually arrive at its destination.

When I present a diversified mutual fund portfolio to potential clients some of them are less than thrilled. I get comments like: “That’s it?” or “I’m doing better on my own!” or “I want to be more aggressive trading individual stocks.” Some people want the sizzle more than the steak.

A diversified portfolio of mutual funds is based on your financial goals, identified and quantified through your financial plan. Your portfolio is built for the long-term with a main goal of asset preservation through rising and falling markets.

If you’re attracted to shiny objects and feel the need to speculate, limit your trading dollars to 3% to 5% of your investable assets. Do not speculate or trade in your retirement accounts.

Markets fluctuate, and losses are inevitable, especially in the short term. One of the best ways to protect your portfolio against permanent loss is to own a globally diversified portfolio of low-cost mutual funds and review your financial plan often. Over time, markets recover and appreciate.

“The stingy are eager to get rich and are unaware that poverty awaits them.” ~ Proverbs 28:22

November 20, 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.wsj.com/articles/energy-losses-prompt-emotional-video-to-options-firms-clients-1542709800, Gunjan Banerji, 11/20/2018

[2] Ibid

Expectations

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At the beginning of each football season every NFL team has high hopes of winning the Super Bowl, even the Cleveland Browns. Enthusiasm and expectations are high.

During the 1970s the Minnesota Vikings were one of the most dominant football franchises in the NFL, winning 78% of their games from 1969 to 1977. Because of their stellar play they had the opportunity to participate in four Super Bowls. Despite their regular season success, they failed to win one title. They were the first team to lose four Super Bowls.

Not to be out done, the Buffalo Bills conquered their opponents in the early 90s. They won 76% of their games and appeared in four consecutive Super Bowl’s, the first team to do so. They lost all four.

These two teams had four chances to win a Super Bowl but failed to do so. Despite losing every title game, were their seasons successful? I’m sure there was disappointment, but they did win several games and play in multiple Super Bowls, an opportunity lost on most teams.

In January, investor hopes were high as the Dow Jones soared more than 5%, crossing 26,000 for the first time. In hindsight, we should’ve sold all our stocks in January and moved to cash. After it peaked, it promptly fell 10.3%.

As we approach the end of the year, most asset classes are trading in negative territory. U.S Stocks remain in positive territory, but bonds, international investments, emerging markets, real estate, and commodities have negative returns. A challenging year for diversified portfolios.

Dimensional Fund Advisors Global 60/40 (60% stocks, 40% bonds) Fund has generated an average annual return of 8.1% since 1984. This fund is diversified across multiple countries, several sectors, and thousands of securities. It has made money 78% of the time, a similar winning percentage to the Vikings and Bills during their Super Bowl runs.

The S&P 500 Index has posted positive annual returns 73% of the time and since the end of World War II it has averaged 11.3%.

Despite stellar winning percentages and generous annual returns, sometimes investments, all investments, fail to live up to expectations.

What should you do if your investment hopes and dreams have been dashed this year? Here are a few suggestions.

Be Patient. No trend lasts forever. Circumstances change. After the Dow Jones fell 10% in January, it rose 15% for the next eight months. In 1994, the S&P 500 gained a paltry 1.4% before rising 144% from 1995 to 1999. Long-term government bonds fell 14.9% in 2009. They appreciated 41% over the next three years.

Plan. During the volatile months of February and October, I was able to stress test client portfolios and no one’s goals were impacted due to the market’s downturn. The financial plan allowed me to review client goals and portfolios in real time. The analysis gave us comfort despite the lack of cooperation from the markets. A financial plan may help you with your long-term goals and give you peace of mind when markets fall.

Rebalance. As markets move around the world, it’s likely your asset allocation has changed. If your portfolio is off kilter, rebalance it back to its original state. The best time to reset your portfolio is in January after your year-end capital gains and dividend distributions have been credited to your account.

Nothing. If your goals have not changed and your asset allocation is normal, stay the course. Don’t trade. Let your portfolio find its footing. For example, if you purchased the Dimensional Global Portfolio in 2008, you lost 22.7%. However, if you did nothing and held it through the end of 2017, you made 6.1% per year.

Pursue. During market disruptions there’s always opportunities to find good investments. If you have cash to invest, look for investments you can add to your portfolio for future growth.

As we close out 2018, spend some time honing your goals and reviewing your portfolio. In a few weeks it will be a new year, a new season and hope springs eternal.

“Winning means being unafraid to lose” ~ Fran Tarkenton

November 19, 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.

 

 

 

 

My Two Best Days

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Tommy Lasorda once said, “The best possible thing in baseball is winning the World Series. The second-best thing is losing in the World Series.” He added, “When we win, I’m so happy I eat a lot. When we lose, I’m so depressed, I eat a lot. When we’re rained out, I’m so disappointed I eat a lot.” Mr. Lasorda didn’t let his circumstance alter his mood. He recognized the beauty of playing baseball regardless if his teams won, lost or were rained out. His two favorite days were managing when the team won and managing when they lost.

When I’m asked about how the market is performing, I’m not sure how to respond because up days and down days both provide excellent opportunities to investors. Of course, everybody likes to make money from a rising market. When stocks are rising consumer confidence is high and people feel good about their wealth and they spend money.

When the market is falling, people feel depressed and frightened because they see their assets dropping in value. When stocks fall, investors lose confidence and spend less money.

Should it matter if stocks are rising or falling? Over time, the answer is no. Stocks have risen about 73% of the time since 1926 and 54% of the time they’ve been the best performing asset class.[1] Since 2009 the S&P 500 Index has risen 267%, averaging 14.15% per year. It has not had a losing year since 2008, including this year.

A winning percentage of 73% is pretty good, but what about the remaining 27%? The market has finished in negative territory 27% of the time since 1926 and we have experienced some doozies. The market fell 43% in 1931, 35% in 1937, 26% in 1974, 22% in 2002, and 37% in 2008. Despite these disruptions, the market has averaged 10% per year for almost 100 years.

When markets drop, fear rises. However, when stocks fall you have an opportunity to buy great companies at better prices. Investors loved Amazon at $2,050.50 but hated it after falling 26% to $1,520. Why? Amazon was the same company on October 17 at its high as it was on October 30 near the low. If the market rises most of the time, why not use down days to add stocks to your portfolio? Instead of fearing a drop, get excited that you can now add great companies to your account.

As I mentioned, the S&P 500 has been the top performing asset class 54% of the time, meaning 46% of the time another investment is doing better. In 2008, long-term bonds soared 26%. Last year emerging markets climbed 35%. No trend lasts forever, so a diversified portfolio is recommended so you can take advantage of all global markets.

A globally diversified portfolio of mutual funds with a mix of 60% stocks, 40% bonds has generated an average annual return of 7.5% for the past 20 years despite the lost decade from 2000 to 2010.[2] A $100,000 investment in 1998 is now worth more than $424,000.

To stay invested for the long haul and to benefit from the rise in global markets, you need a plan. Your plan will align your goals, risk tolerance, asset allocation and investment selection. With this alignment you can enjoy the up days and tolerate the down ones. Your plan will keep you focused on those things that matter to you and your family most.

I like up days and down days, so, to me, the market is always doing well regardless of the daily moves. Markets have been rising and falling for centuries, so take advantage of up and down days to generate wealth for you and your family.

Man, I did love this game. I’d have played for food money. It was the game… The sounds, the smells. Did you ever hold a ball or a glove to your face? ~ Shoeless Joe Jackson (Ray Liotta – Field of Dreams)

11/12/2018

Bill Parrott is the President and CEO of Parrott Wealth Management 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] Ibbotson® SBBI® 2015 Classic Year Book

[2] Dimensional Fund Advisors 2018 Matrix Book

Slow Money

Posted in Financial Planning, Retirement Planning, Wealth ManagementTagged , , Leave a comment

CNBC’s Fast Money is “America’s post-market show to bring you the actionable news that matters most to investors.” The panel of traders discuss stocks, ETF’s, options, and bitcoin. They talk in technical terms and use graphs and charts to highlight their main points. They sound convincing and make it look easy as if all you had to do was buy a stock after it bounces off the 200-day moving average and ride it until it hits resistance where you can sell it for a tidy profit.

Trading is like a sporting event with winners and losers. It’s also profitable to brokerage firms and exchanges. The more you trade, the more money they make. If they make more, you make less.

When you trade you’ll be competing against professionals and large Wall Street firms capitalized with trillions of dollars. Your emotional behavior will have a huge impact on your trading success more so than professional traders. Will you be able to set strict trading rules? How will you react when your stock breaks the 200-day moving average and falls 20% in a single trading session? Will you sell it? Will you buy more convinced that you’re correct and that everybody else is wrong? Will you sit on your loss hoping it rebounds to your purchase price? Day traders in J.C. Penny (JCP), Sears Holdings (SHLDQ), and GE are still waiting. Did you notice the “Q” in the Sears symbol? It represents bankruptcy.

What if you want to trade the market? If you want to commit your hard-earned dollars to trading, limit it to 2% to 3% of the money invested in your taxable account. Do not trade in your IRA because you can’t write off your losses.

Let’s look at three different companies – Company A, B and C. All three have different chart patterns. Company A is rising and trading at all-time highs. Company B is in a free fall trading near historical lows. Company C is in a holding pattern and it appears to be building a base. Which stock would you buy? Which one looks more appealing?

 

AMZN A

 

AMZN B

 

 AMZN C

Company A is Amazon from June 1, 1997 to July 31, 1998 not long after it launched its IPO. The stock rose 1,100% during this window.

Company B is Amazon from November 1, 1999 to October 31, 2001 where it fell 92%. Amazon was hit hard during the tech-wreck.

Company C is Amazon from July 1, 2004 to March 31, 2007 where it gained 2.2%. It’s hard to believe, but for about three years the stock barely budged.

The best time to have bought Amazon was after it fell 92%, as it did in chart B. If you had the courage to buy at the low, you would’ve made over 23,000%! In hindsight it appears easy, but if you bought it in 2001, you would have endured 19 different months where it dropped 10% or more. Its worst monthly drop occurred in July 2004, falling 31%. It takes courage, conviction and luck to time the market.

Is there a better way? A slow money strategy based on your financial goals and dreams can treat you well over time. A financial planner can design a portfolio of low cost, globally diversified mutual funds based on your objectives. This strategy can minimize your investing mistakes and costs, allowing you to keep more of what you earn.  Your plan will help you prioritize the things that are most important to you and your family allowing you to grow your wealth across generations.

Short term trading with fast money can be detrimental to your long-term wealth, so go slow instead!

It doesn’t matter how slow you go so long as you do not stop. ~ Confucius

11/7/2018

Bill Parrott is the President and CEO of Parrott Wealth Management 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.