Month: December 2018

Who Cares?

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Who cares that the current bull market has risen more than 260% when stocks have dropped 7% in the past month? Does it matter that stocks have generated an average annual return of 10% for the past 100 years or markets rise 75% of the time when this year will be negative? Stocks have outpaced bonds and cash for decades, but so what? This year bonds and cash have the upper hand.

The current bull market started on March 9, 2009 after a grueling 17-month bear market. The current recovery is (was) over nine years old – one of the longest recoveries on record.  Did the market go straight up during this historic run? Of course not. It was littered with several corrections.

During this bull market, the Dow Jones experienced 68 days when it fell 2% or more and 45% of the time it produced a return of 0% or worse. The average daily gain has been .06% – yawn.

Here is a year by year look at this bull market.

2009 – After the bull market started, it dropped 7.42%. It finished the year up 18.82%.

2010 – During this year the market fell 7.6%, 13.5% and 5.12%. It finished the year up 11.02%.

2011 – During this year the market fell 6.28%, 7.12%, 16.26%, and 8.17%. It finished the year up 5.53%.

2012 – During this year the market fell 8.87% and 7.75%. It finished the year up 7.26%.

2013 – During this year the market fell 4.86%, 5.6%, and 5.75%. It finished the year up 26.50%.

2014 – During this year the market fell 13.75%, 4.5%, 6.64%, and 4.95%. It finished the year up 7.52%.

2015 – During this year the market fell 14.44%. It finished the year down 2.23%.

2016 – During this year the market fell 10.12%. It finished the year up 13.42%.

2017 – During this year the market fell 1.9% – a mild year. It finished the year up 25.08%.

2018 – This year the market has fallen 11.58%, 4.75%, and 12%. The year isn’t over yet!

As you can see, this bull market experienced significant drops, but it always recovered. Will this time be different? Who knows? Time will tell.

Here are a few suggestions if you’re concerned about the recent market volatility.

  1. If you need money in the next one, two or three years, do not invest it in the stock market. Rather, invest in a money market fund, CD or U.S. Treasury Bill.
  2. If the market is keeping you up at night, your allocation to stocks is too high. Sell your stocks to your comfort level.
  3. Work on your financial plan. Your plan will determine your asset allocation based on your goals. If your plan, goals, and asset allocation are aligned, you’re more likely to stay invested through good times and bad.
  4. Time the market. Sell at the top; buy at the bottom. Just kidding. No one has been able to consistently time the market, but who knows, you may be the one to do it.

These past three months have been brutal. The market downturn has turned a decent year into a poor one. This happens occasionally. During the next two weeks spend some time reviewing your goals. If they’re still intact, stay the course.

People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game. ~ Peter Lynch

December 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 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.

 

Source: YCharts. Year by year data does not include dividends.

 

Photo Credit: Victor Brave

 

 

 

 

Is Bad Good?

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Global markets have dropped considerably the past three months. The Dow Jones has fallen about 8% as investors react to negative headlines about trade wars, Brexit, interest rates, and several other issues. They have been selling stocks to buy bonds or park money in a cash account. These remedies may feel good in the short-term, especially as markets fall, but over time it’s not a wise strategy.

Quantifying investor behavior is challenging. Calculating emotions in a spreadsheet is impossible. However, sentiment indicators try to capture this information.

Sentiment indicators are contrarian, by nature, and they tend to follow the market’s direction. If stocks rise, so do the indicators.

The CBOE Volatility Index (VIX), CBOE Equity Put/Call Ratio, the American Association of Individual Investors Bull-Bear Spread, and mutual fund flows are a few of the more popular sentiment surveys.

The CBOE Volatility Index, the VIX, is the fear gauge. When fear is high, it rises. On November 20, 2008, it peaked at 80.86, indicating an extreme level of fear in the markets. Stocks would fall for a few more months before rising 267%. The average VIX reading is 18.39. It currently stands at 21.63.

The CBOE Equity Put/Call ratio is an indicator utilizing options. When it’s above .7 investors are buying more puts than calls. Put buyers expect the market to fall so they’ll profit if it does. When investors buy calls, they expect the market to rise. If the reading is above .7, it’s bullish. Below .45 is bearish. The current reading is .79. On August 21, 2008, the put/call ratio was .39. Investors were buying calls because they were optimistic the market would continue to rise. They were very confident – too confident. The market fell 37% by the end of 2008.

Measuring mutual fund flows is another solid indicator for investors. When they feel secure, investors buy mutual funds. When they’re scared, they sell. From April 2016 to December 2016 investors withdrew $199 billion from equity mutual funds fearing a market drop. In 2017, the Dow Jones rose 24.33% – a great year for the index. In the past three months investors have sold $62 billion worth of mutual funds.

My favorite sentiment indicator is from the American Association of Individual Investors. When this indicator is high, investors are confident. On August 21, 1987, the indicator reached 66. Two months later the Dow Jones fell 22% – the worst one-day drop in its history. On January 6, 2000, it hit an all-time high of 75. Three months later the Tech Wreck would arrive. The NASDAQ index would fall more than 50% over the next two years.  One of the most pessimist readings ever recorded was March 5, 2009 when it touched 18.92. Four days later stocks hit bottom and started a nine-year bull run. Today the indicator is flashing a pessimistic warning of 20.90%. The historical average is 38.24.

These indicators are currently in negative territory, a positive for stocks. When pessimism and fear rise, stocks look more attractive. The market likes to climb a wall of worry.

Not to be left out of the indicator game, the New York Times ran an article about the 2019 financial crisis that hasn’t happened yet. The article appeared in their style section.[1] Business Week’s famous headline, “The Death of Equities” appeared in August 1979. Had you purchased stocks on the day it ran, you would have enjoyed a gain of 2,641%!

Ron Paul is also getting into the prediction business. He’s predicting a 50% correction that will “spark depression-like conditions that may be ‘worse than 1929.’”[2]

Of course, no indicator is perfect. A negative one isn’t always positive. It’s imperative to focus on your goals. If they haven’t changed, stay the course. It takes courage and fortitude to hold stocks when everybody is selling but owning great companies for the long haul is how wealth is created.

The big money is not in the buying and the selling, but in the waiting. ~ Charlie Munger

December 17, 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] https://www.nytimes.com/2018/12/10/style/2019-financial-crisis.html, by Alex Williams, 12/10/2018

[2] https://www.cnbc.com/2018/12/14/ron-paul-market-meltdown-could-spark-depression-like-conditions.html, by Stephanie Landsom

Ditch Your Estate Plan?

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Estate planning is vital for people with significant wealth. A properly structured plan can aid in the successful distribution of your assets to those you love. Transferring assets to your beneficiaries, while avoiding estate taxes, is paramount for most individuals.

Estate planning is primarily a one-time event. You meet with your attorney, create a will or trust, and then you put it in your safe. The documents probably contain standard language to transfer money to your children, relatives, or charities once you’re deceased.

Of course, you’ll have no control over how your estate plan will turn out because you’ll be dead. The successful distribution of your estate will rely on others, hopefully people you trust, to honor your wishes. Yes, your instructions are written and recorded, but your executor still must execute. The beneficiary can pursue legal action if they’re aware of a breach of fiduciary duty by the trustee.

An addition to your estate plan is a wealth transfer plan. A wealth transfer plan is a process allowing you to give money away while you’re living. You will be able to control the assets, distribution, and timing of your gifts.

For example, if you give money to your children and they’re excellent stewards of your gift, then you can entrust them with more money. If they aren’t, you can limit how much money they’ll receive in the future. It’s a test run.

The same is true for gifts to churches, charities, and organizations. You’ll be able to witness how they handle your donation. If they do it well, you can be confident they’ll treat your future gifts in the same manner. If they’re poor stewards, you can remove them from your estate plan.

A wealth transfer plan will allow you to actively manage your distributions, a luxury you won’t have with your estate plan once you’re gone.

His master replied, ‘Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. ~ Matthew 25:21

A few years ago, I was having a conversation with a client about her estate plan. We discussed giving her money away sooner rather than later. She wanted to support her family financially while experiencing the joy of giving. She decided to help the younger generation with their education. As a result, her gifts will bear fruit for decades. Her giving has not hindered her financial plan, if anything, it has been enhanced.

A wealth transfer plan will also help your beneficiaries because they’ll be part of the process. No one likes surprises, even if it’s millions of dollars. A large, unexpected gift may do more harm than good, especially if your kids don’t have the experience to manage substantial wealth. Including children in the conversation about how you plan to distribute your estate will set expectations for all. Your family will remain united and, hopefully, sibling rivalries will be avoided.

Estate planning involves trust, love and respect. If you put significant restrictions on your children before they can receive their money, you probably don’t trust them much. It’s a lack of trust if you make your children adhere to several rules or jump through hoops to be compliant with your wishes.  What is the message you’re sending? I love you, but… If you don’t trust your kids with how they’ll spend the money, don’t give them any. Setting up a trust with trap doors won’t change their behavior or your faith in their ability to meet your demands. Of course, if your kids are minors or have special needs, then a trust is recommended.

Giving through a wealth transfer program will educate your kids on how best to handle money. Your experience and wisdom can help them become better stewards of resources. Working together as a family will pay dividends for years to come.

Wisdom, like an inheritance, is a good thing and benefits those who see the sun. Wisdom is a shelter as money is a shelter, but the advantage of knowledge is this: Wisdom preserves those who have it. ~ Ecclesiastes 7:11-12

Randy Alcorn said, “You can’t take it with you, but you can send it ahead.” Wise words. There are no banks in Heaven. What’s the point of dying with millions, or billions, of dollars? Why not distribute your estate while you can?

Here are a few questions to ask if you want to create a wealth transfer program.

Why are you saving money? What’s the goal for your resources? A financial plan can answer these questions. Your plan can create multiple giving scenarios and strategies. The plan will quantify and clarify your goals.

Who will receive your money? When will they receive it? How will they receive it? The timing and titling of your assets is important.

Do you own a business? Who will run it when your gone? Do your kids want to be business owners? Do they have the capacity to operate a company? If you have multiple children, who will call the shots?

What if your wrong? If your giving plan isn’t working, you can make changes while you’re alive and in control. After your gone, your estate plan is irrevocable.

So, should you ditch your estate plan? No. A thoughtful wealth transfer plan, coupled with your estate plan, will benefit many – especially you and your family. You’ll be able to witness the joy of giving and they’ll be able to create a solid foundation. Win-win.

Naked I came from my mother’s womb, and naked I will depart. The Lord gave, and the Lord has taken away; may the name of the Lord be praised. ~ Job 21:1-2

December 13, 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.

Riptides

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Growing up in Southern California I spent a considerable amount of time at the beach – Huntington, Newport, Laguna and Mission – boogie boarding, body surfing, snorkeling, or scuba diving. On occasion I’d get stuck in a riptide.

Riptides are dangerous and can be life threatening. The most important thing to do if you’re caught in one is to relax. Don’t try to swim directly back to shore because the riptide is pulling you out to sea. It’s exhausting to swim against the tide and this is when you’ll get in trouble. To escape, swim horizontally to the riptide, parallel to the shore. Once you start swimming across the tide, identify a lifeguard tower to help you keep your bearings. After a while, you’ll be out of the riptide and you can swim safely back to shore.

Investors probably feel like they’re stuck in a financial riptide because the markets, all markets, are struggling this year.

Mutual funds are having a lackluster year. In fact, 82.5% of all mutual funds are in negative territory.  There are a few funds up more than 10% for the year, very few. The percentage of funds in double digit territory is .74%. Ned Davis Research recently reported that no asset class has generated a return of more than 5% – a first since 1972.[1]

Individual stocks aren’t faring much better as 70% of U.S. stocks are trading in negative territory.

What should you do if your portfolio is stuck in a financial riptide?

  • Don’t panic or make rash decisions.
  • Review your plan and your investments. Are you still on track to reach your goals? If you are, do not make any changes.
  • Look for bargains. In a down year, locate good investments that are oversold to add to your portfolio for future growth.
  • Rebalance your portfolio. As markets fluctuate, it’s possible your asset allocation is out of sync. For example, if your original allocation was 50% stocks, 50% bonds, it may now be 40% stocks, 60% bonds. When you rebalance, it will return your portfolio’s asset allocation to your original stance of 50%/50%.

Sometimes you must go sideways to reach your goals. It would be nice to generate a 10% return every year, with no downside, but this isn’t possible. Like tides, markets rise and fall. They fluctuate. The market will eventually recover. In the meantime, keep your eyes fixed on the horizon and focus on your long-term goals.

Life is a little like a message in a bottle, to be carried by the winds and the tides. ~ Gene Tierney

December 11, 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] MSCI Bloomberg Barclays Indices, Ned Davis Research, Inc. Russell, Source: S&P GSCI, Ed Clissold, Chief U.S. Strategist for Ned Davis Research Group, 11/26/2018,

What is Average?

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At lunch a few weeks ago, a friend of mine said he didn’t want his son to be average. I was struck by his comment because all his kids do well in school and they’re exceptional athletes. I then spent some time pondering the word – average. What is average? According to Merriam-Webster it means a single value that summarizes or represents the general significance of a set of unequal values. It also states a level, typical of a group, class, or series.

Do you know Akani Simbine? He is an Olympic sprinter from South Africa who finished 5th in the men’s 100-meter dash at the 2016 Olympics. His time was 9.94 seconds – the average winning time of the eight runners in the race.  By Olympic standards, he’s an average sprinter. However, if he raced anybody else in the world, he’d win – by a lot. Is Mr. Simbine average?

The average score for the top 20 finishers at the 2018 Masters was 281. Tony Finau finished 10th with a score of 281. Is Mr. Finau an average golfer? If he was in your foursome at your local muni course, do you think he’d win? I do.

The average height of an NBA player is 6 foot 7. Russell Westbrook is only 6 foot 3. He has below average height, but if he showed up at your local YMCA to play basketball, he’d dominate the court. Would you be able to guard Mr. Westbrook one on one? Doubtful.

Average is relative. Metrics and benchmarks matter.

Some investors shun index funds because they’re designed to generate market returns, or average returns. Who wants average returns? If you were able to capture these returns, your account balance would grow substantially. Yet, most investors fail to do so and, as a result, produce below average returns.

According to a 2017 Dalbar study, investors underperformed the S&P 500 by a wide margin. The S&P 500 is an unmanaged index of stocks. At the time of their report the index returned 11.96%, the individual investor made 7.26%, a difference of 4.7%. The 20-year annualized return for the index was 7.68%, the individual made 4.79%.[1]

The dollar differential is staggering. A $100,000 investment for twenty years earning 7.68% will grow to $439,239. If the rate drops to 4.79%, the balance falls to $254,915, a difference of 42%.

Why do individual investors constantly underperform the market? Here are a few reasons.

Emotions. Investors fall prey to greed and fear. They buy high and sell low. When stocks rise, investors feel good and they buy more stocks. When stocks fall, investors panic and they sell their holdings. The best time to buy is when everybody else is selling.

No Plan. Investors without a financial plan are likely to react to negative news. They don’t have a game plan. Without a plan, it will be a challenge for investors to have much financial success. An archer needs a target.

Short-term thinking. Markets fluctuate, and no trend lasts forever. Focusing on recent, short-term market moves may cause investors to lose sight of their long-term goals. Marathon runners don’t panic at the five-mile mark.

Noise. TV shows, newspaper headlines, Facebook posts, and tweets will try to knock you off your target.  Distracted investors make mistakes. Focus on your goals and tune out the noise.

Lack of accountability. A trusted advisor can help you navigate troubled waters. A Certified Financial Planner™ can design a plan and portfolio fit for you and your family.

Buy and hold investors can capture average market returns if they have the courage to stay the course. Focusing on your goals and following your plan will pay substantial dividends. Average returns may deliver above average wealth.

I feel like a fugitive from the law of averages. ~ William H. Mauldin

December 10, 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] https://www.marketwatch.com/story/americans-are-still-terrible-at-investing-annual-study-once-again-shows-2017-10-19, Lance Roberts, 10/21/2017

What’s a Yield Curve?

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The hot topic this week is the yield curve, or more importantly, the inverted yield curve. What the heck is a yield curve?  It’s a collection of interest rates, or yields, plotted on a chart. Rates begin with the one-month U.S. Treasury Bill and end at the 30-year U.S. Treasury Bond. The curve plots all points in between.

Historically, it slopes upward and to the right because short-term rates have been lower than long-term rates. Makes sense. If you buy a 30-year bond, you want to be compensated for your risk in the form of a higher rate.

The yield curve can be normal, flat or inverted. The chart below shows all three. Blue is normal, orange is flat, and gray is inverted.

Yield Curve

A normal yield curve tells us that if we buy a long-term bond, we’re going to earn more interest than a short-term one. With a flat yield curve, it doesn’t matter which bond you buy, because all rates are the same. When the yield curve is inverted, you earn more interest with a short-term bond than you do from a longer term one.

A normal yield curve also signals a strong economy with no known issues on the horizon – ceiling and visibility unlimited. When the curve inverts, trouble awaits. What trouble? A recession. An inverted yield curve has previously been a reliable recession indicator. It’s a sign our economy may be losing steam.

It’s true, an inverted yield curve has been a good indicator. However, the correlation between an inverted yield curve and a recession is not instantaneous. It may take one to two years before a recession occurs after the curve has inverted. It takes time to slow down a $20 trillion economy.

Is the yield curve currently inverted? No. The yield on the one-month T-Bill is 2.334% while the rate for the 30-year T-Bond is 3.176%. This is a normal yield curve, sloping upward and to the right.

Parts of the yield curve are inverted. The 2-year and 5-year rates are slightly inverted. Experts are concerned that this is the beginning of the end, but this is like a driver in Houston who’s worried about a traffic jam in Los Angeles.

The Fed Funds rate is currently yielding 2%, the only rate the Federal Reserve controls. The remaining rates are left to market participants – buyers and sellers. If we compare the Fed Funds rate to all interest rates, the yield curve is normal.

Earlier this year the market sold off because interest rates were rising. Today stocks are selling off because interest rates are falling. The recent price action in the stock and bond markets can be attributed, mostly, to the uncertainty surrounding the trade war between the U.S. and China. Markets hate uncertainty. When investors stare into the abyss of the unknown, they sell stocks and buy bonds. When bonds are bought, rates fall.

The price of oil has also dropped. Lower oil prices coupled with lower rates are a positive for the consumer. The current unemployment rate is 3.7%, so 96.3% of Americans are working. When the American worker pays less at the pump and takes advantage of lower interest rates, they spend money – a boost to our economy.

In the movie Top Gun, Maverick and Goose inverted their F-14 Tomcat, so they could take a picture, and give the bird, to a Russian MIG pilot. After the encounter, they return the plane to normal, fly back to Miramar and buzz the tower. Their inversion didn’t hinder their ability to continue to fly the plane.

Slower growth doesn’t mean no growth. If our economy was travelling at 75 miles per hour a couple of years ago, it may be cruising at 55 MPH today.

Our economy is strong, corporate earnings are robust, interest rates are low, and taxes are favorable. These factors bode well for a higher stock market at some point. Follow your plan, diversify your assets, think generationally, and good things can happen.

Because I was inverted. ~ Maverick, Top Gun

December 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 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.

 

 

 

Raking Leaves

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The fall foliage in New England is amazing – full of splendor and beauty. I lived in Connecticut for a few years and the color of the fall leaves were always spectacular. However, they eventually fell off the trees and someone had to pick them up.

Raking leaves is not an activity I enjoy, a daunting task. This weekend, my yard was covered with thousands of leaves that needed to be picked up.

To attack this problem, I needed a plan for transferring the leaves from my yard to the (environmentally friendly) trash bags. As I surveyed the yard, I decided on three options.

Option 1: Do nothing. Leave the leaves alone and let mother nature take care of it.

Option 2: Rake them into one giant pile.

Option 3: Start at the front of my yard, work my way to the back and rake the leaves into several small piles that are easy to pick up.

I chose option 3. Breaking my task into small, manageable pieces allowed me to move across my yard with efficiency and skill.

Creating a budget, financial or investment plan may be a daunting task for you and your family. Like a yard covered in leaves, your paperwork may be scattered around your house – unorganized and in disarray.

Here is a guide to help you get on track and organized.

Monday: Gather your bank, credit card, loan, investment, and other financial statements and put them into individual piles. Use manila folders and title each one accordingly to help you organize your documents.

Tuesday: Review your bank and credit card statements to identify where your money has gone. Looking back over the past 5 or 6 months is recommended. Create individual categories such as mortgage, auto, food, entertainment, etc. and enter the data in Excel or write it on a yellow pad. This will be the start of your budgeting process. Do you notice any trends or themes?

Wednesday. Identify your income streams by reviewing your paystubs, 1099s and other income generating documents.

Thursday. Evaluate your investment statements. Write down your account values, asset allocation, dividends, interest, and total fees paid.

Friday. Assess your health, insurance, and retirement benefits. Are your beneficiaries up to date? Do you have enough insurance coverage? Are you contributing enough money to your retirement accounts?

Saturday: Review your estate planning documents: wills and trust. Do they need updating? Do you need to create one? Are your loved ones protected?

Sunday: Rake leaves.

If you approach these tasks day by day, they will be easier to accomplish. After a week, your financial affairs will be organized, and you’ll have started a financial plan. Of course, if you don’t want to do these items yourself, contact a Certified Financial Planner™ to help you create a financial plan and get organized.

How do you eat an elephant? One bite at a time ~ Anonymous

December 4, 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.