Concerned About the Presidential Election?

The presidential election is coming, and investors are shifting their tired, worrisome gaze towards the fall. We’re still battling the virus and dealing with racial tensions. Now we must add the election to the mix. Each political party, and legions of supporters, are convinced that the “other” party will tank the economy and the stock market once the election is over. Is this true? Will stocks fall if Trump wins? What about Biden?

On the heels of the 2016 election, the Brookings Institute projected that stocks would fall 10% to 15% if Trump won. In a CNN article, they wrote, “almost everyone on Wall Street currently predicts Hillary Clinton will win the White House.” They added: “A Trump triumph would likely cause investors to flee stocks to the safety of gold and bonds.”[1] Trump did win, and stocks have risen 44% from election day while bonds rose 26%, and gold has increased by 41%.

^DJI_IGPUSD_^SPXBA_chart

Since 1928, there have been twenty-three elections. The average annual return during these election years has been 11.28%, and 87% of the time, stocks finished the year in positive territory.

Fidelity has done extensive research on elections and market returns. It’s fascinating data. From 1789, the stock market has generated an average annual return of 9.1% during election years. The data below shows how the stock market performed under various election scenarios according to their report.[2]

  • Republican President: Average annual return = 8.6%
  • Democratic President: Average annual return = 8.8%
  • Republican Sweep: Average annual return = 8.6%
  • Democratic Sweep: Average annual return = 8.2%
  • Republican President and Divided Congress: Average annual return = 8.7%
  • Democratic President and Divided Congress: Average annual return = 10.9%

Fidelity’s study spans 231 years, so let’s review the stock market performance, as measured by the S&P 500, for our most recent Presidents.[3]

  • William J. Clinton = 210%
  • Barack H. Obama = 182%
  • Ronald W. Reagan = 117%
  • George H.W. Bush = 51%
  • Donald J. Trump = 44%
  • Jimmy E. Carter = 28%
  • George W. Bush = -40%

The presidential election will stir up plenty of emotions and cause the stock market to gyrate considerably. However, the election will have little impact on your investment portfolio. Rather than worrying about the election, focus on your financial goals. A more significant impact on your wealth will be how much money you save and invest. If you save more than you spend, your wealth will increase. Allocating a large percentage of your assets to stocks may allow you to create generational wealth because stocks historically outperform bonds.

If you’re concerned the “other party” will destroy the market, you probably own too many stocks, or you have never completed a financial plan. A financial plan will help you determine the appropriate asset allocation so you can handle multiple market conditions. During the stock market correction this past March, we regularly checked our client’s plans to make sure their goals were still intact – and they were.

I recently talked with a client who was concerned about his rising expenses because of a home purchase. I informed him we factored in an increase in his living expenses for the next two years, so he was going to be okay. He said he was going to sleep well that night. A financial plan, your plan, will remove confusion, complexity, and worry so you can pursue things you enjoy.

Elections come and go, so don’t let political anxiety weigh you down every four years. Follow your plan, focus on your goals, save your money, invest often, diversify your assets, think long-term, and good things will happen.

Be sure to put your feet in the right place, then stand firm. ~ Abraham Lincoln

July 24, 2020

Bill Parrott, CFP®, 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

[1] https://money.cnn.com/2016/10/24/investing/stocks-donald-trump-hillary-clinton/ Heather Long, October 24, 2016

[2] https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-returns-and-elections Jurrien Timmer, Director of Global Macro, Fidelity Management & Research Company

[3] https://www.forbes.com/sites/sergeiklebnikov/2020/07/23/historical-stock-market-returns-under-every-us-president/#4a589312faaf Sergie Klebnikov and Halah Touralai, Forbes Staff Writers, July 23, 2020

Did You Miss the Rebound?

The first few minutes of a flight are exhilarating as the pilot throttles the plane down the runway and points its nose heavenward. A stock market recovery is fast and furious, particularly after a steep drop. If you miss the start of a recovery, you will forego substantial gains. From the March 23 low, the Dow Jones, S&P 500, and NASDAQ have climbed substantially. The NASDAQ is up 57% while the S&P 500 and Dow Jones have risen more than 45%.

^IXIC_^SPX_^DJI_chart (1)

Did you miss the rebound? Is it too late to get back in the market? If you liquidated your portfolio in March, should you now repurchase your stock holdings? If you’re still standing on the tarmac looking up at a soaring stock market, you can take comfort in knowing that the Dow Jones and S&P 500 are down to flat on the year.

^SPX_^DJI_chart

Outside of large-cap technology stocks, most sectors are performing poorly this year. Small-cap stocks, international companies, and real estate holdings are trading in negative territory. Small-cap and real estate stocks are down more than 14% for the year.

^MSEM_^SML_^MSEAFE_^SPCSERES_chart

Despite the recent rally, it’s not too late to invest in the markets, especially if you purchase a diversified portfolio of funds. It doesn’t make sense to time the market if you own a basket of funds because you will always have some sectors trading up and others trading down. It’s better to stay fully invested so you can take advantage of the long-term trend of the markets. You will miss opportunities if you regularly buy and sell your investments.

Also, markets move. Today’s winner could be tomorrow’s loser. As I mentioned, large-cap technology stocks are outperforming most sectors this year, but it hasn’t always been the case. From 2000 to 2010 the NASDAQ lost 44% while emerging markets rose 102% and small-caps were up 68%.

^IXIC_^SML_^MSEM_chart

According to Dimensional Fund Advisors, a 60% stock and 40% bond portfolio has generated an average annual return of 8.97% since 1926. A moderately balanced portfolio of stocks and bonds has weathered 94 years of booms, busts, wars, pandemics, corrections, depressions, and recessions. And, for the brave who refuse to sell, it has produced generational wealth. A one-dollar investment in 1926 is now worth $3,350. Of course, 94 years is a long time, so what has it done lately?[1]

A Dimensional 60/40 model is up 6.36% for the year and more than 16% for the past twelve months. For the past three, five, and ten years, it has returned more than 10% per year.  On a rolling ten-year calendar, the model has never lost money. The best ten-year performance for this model started in 1982, averaging more than 17.5% per year. The worst decade started in 1929, generating a gain of .21% per year.[2]

Rather than trying to time the market, focus on your financial plan and your personal goals. A portfolio that you own for decades based on your goals will yield better results than attempting to buy at the bottom or sell at the top.

Let time in the markets work for you and your family.

“Time is free, but it’s priceless. You can’t own it, but you can use it. You can’t keep it, but you can spend it. Once you’ve lost it, you can never get it back.” Harvey Mackay

July 21, 2020

Bill Parrott, CFP®, 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] https://returnsweb.dimensional.com/, data ending 6/30/2020. The 60/40 index consists of the S&P 500 and long-term government bonds

[2] Ibid

I Don’t Want to Invest In Stocks

Investors are nervous; despite the recent rally in stocks, and they are looking to sell shares because of the virus or the economic environment. It’s forcing some individuals to reconsider their exposure to risk assets. As the market climbs higher and interest rates fall to zero, what else can you do with your money?

If you want to sell your stock holdings, and you’re not excited about investing in bonds, consider a few other alternatives for your assets. Here are a few suggestions.

  1. Reduce your debt. Though interest rates are low, reducing or eliminating your debt is a smart choice, especially debt you can’t deduct like credit cards or auto loans. It doesn’t make sense to store your cash in a bank account with a zero percent interest rate if you’re mortgage rate is 3%, 4%, or higher. Let’s assume your current mortgage balance is $250,000, with twenty years remaining, and it carries a 4% interest rate. If you pay it off today, you will save $113,588 in interest payments.
  2. Buy a second home. Buying a second home in the mountains, at the beach, on a lake, or in the country sounds inviting. In a COVID-19 world, a little elbow room would be nice. Several years ago, I helped a friend run numbers before he purchased a lake house. He made the plunge, and his family has enjoyed the property for many years. Recently, a client purchased a small ranch in central Texas after we completed his financial plan. The plan validated his decision. My grandparents owned an immaculate second home in Laguna Beach – family and friends used it often. A second home can create experiences and memories that last a lifetime.
  3. Remodel your home. The shutdown is creating a remodeling boom. Individuals are upgrading kitchens, bathrooms, and backyards. If you plan to stay in your home for another five to seven years, then give it an upgrade. If you don’t want to spend big bucks, consider a paint job or a few small landscaping projects. According to HGTV, bathrooms, landscaping, and kitchen upgrades have the best ROI.[1]
  4. Donate to a charity. Nonprofits and charitable organizations are struggling, so any money you donate will go along way to help those in need. Consider contributing to groups or organizations you support. A Google search for nonprofit organizations in your neighborhood will yield many results.
  5. Love your neighbor. Are you aware of any friends or relatives who are struggling financially? Do they need a new car? Can you help them pay their medical bills? According to the BBC, “The US is expecting an avalanche of evictions.”[2] If you know someone who is on the brink of being evicted, pay their rent.

Money should be spent; it’s meant to change hands, and hoarding cash is not a wise investment. If you’re not sure how much to spend on a home project or donate to your favorite charity, consider a financial plan. Your plan will help you quantify and prioritize your goals. When a client asks me if they can buy a car or a home or donate money, we will review their financial plan together. And, more often than not, they can proceed. A financial plan gives them the confidence to act on their wishes.

So, if you’re not ready to invest in the stock market, look for alternatives.

“Each time you muster up what it takes and go for it, the next go-round becomes that much easier. Real and important changes begin with small, courageous acts.” ~ Chip Gaines

July 14, 2020

Bill Parrott, CFP®, 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

[1] https://www.hgtv.com/lifestyle/real-estate/top-home-updates-that-pay-off-pictures

[2] https://www.bbc.com/news/world-us-canada-53088352, Jessica Lussenop, June 19, 2020

Which Market?

The NASDAQ is soaring this year despite the political turmoil, racial tensions, and a global pandemic. It has risen 18% so far, and it’s not showing any signs of slowing down as it climbs a wall of worry. A few media outlets and financial experts are referring to the rise as a bubble. Market Watch had this to say about the stock market, “If you still do old-fashioned, cold analytical analysis based on numbers, you’ll see that the stock market is significantly above the mother of support zones. It is now a bubble.”[1]

When individual investors refer to the market, it is the Dow Jones Industrial Average. Is it up? Is it down? Will it keep rising, or will it crash? If the Dow falls more than 250 points, it’s considered breaking news even though it’s less than a 1 percent decline. The Dow Jones gets all the attention, but what about other markets? Is it fair to lump all markets together? What about the other indices?

Morningstar tracks more than 84,000 indices or markets, so when someone asks what I think about the market, I wonder which one they’re referencing. If you own a diversified portfolio of funds, you probably have exposure to dozens of markets.

To find out if the market is overvalued, let’s dissect a traditional 60/40 portfolio – 60% stocks, 40% bonds.

Large-Cap Growth Stocks. This sector has been red hot for more than a decade. The primary fund for this asset class is the Invesco QQQ Trust – The Qs! Stocks in this index include Apple, Microsoft, Amazon, Facebook, Alphabet, Tesla, NVIDIA, and Netflix. This star-studded index is up more than 490% for the past ten years, and it is up 24% on the year. If stocks are in a bubble, it’s this sector.

Large-Cap Value Stocks. Value stocks have trailed growth stocks by a wide margin for the past few decades, and this year is no different. The Vanguard Value ETF is down 16% for the year and up 115% for the past ten. Companies in this index include Johnson & Johnson, Berkshire Hathaway, Exxon Mobil, Pepsi, and Amgen.

International Developed Markets. International stocks have barely budged for the past ten years, rising a paltry 24%. The MSCI EAFE Index (EFA) is down 10.2% for the year, hardly a bubble. Companies in this sector include Nestle, Novartis, Toyota, and Unilever.

International Emerging Markets. This sector is one of the worst-performing asset classes over the past decade. It has risen 6.4% – total, not per year. A $10,000 investment a decade ago is now worth $10,640. Popular stocks in this category include Alibaba, Tencent, JD.com, and Baidu.

Small-Cap Growth. This sector is showing some life this year because it invests in growth stocks. It is up 2.25% for the year, and it has risen 233% for the past decade. Stocks in this index include DocuSign, Moderna, Teledoc, The Trade Desk, and Pool Corp.

Small-Cap Value. As far as US stocks go, few have fared worse than this sector, falling more than 23%. In the past ten years, it has generated an 87% total return. Small-cap and value have been a disastrous combination this year. Companies in this index include PerkinElmer, Allegion, Gaming and Leisure Properties, and ON Semiconductor.

Mid-Cap Index. Mid-Cap stocks are down 6.6% for the year. Over the past ten years, they’re up 171%. This sector includes companies like Lululemon, Splunk, Chipotle, and Clorox.

International Small-Cap. This international sector is down 12.4% for the year, but up 57% over the past ten years. Companies in this index include Rightmove, Bechtle, and Avast.

Real Estate. Working from home (WFH) is taking a toll on real estate stocks. Malls, shopping centers, office buildings, and senior living centers are not doing well in the COVID-19 environment. Does it make sense to allocate money to this sector with all the negative headwinds? I believe it does because real estate stocks will also give you exposure to data centers, cell towers, storage units, and timber. Real estate stocks are down 16% for the year and up 63% for the past decade.

Short-Term Bonds. Short-term US government bonds are the safest investment in the world. They have risen .42% for the past decade, and they’re up .32% on the year. Treasury bills are shelter investments, providing you with liquidity and safety.

High-Yield (Junk) Bonds. Lower rated bonds, known as high-yield or junk bonds, trade more like stocks than bonds, especially when stocks fall. Junk bonds have lost money for the past ten years, falling 12%, and they’re down 6.75% in 2020. A few names in this sector include Ford, American Airlines, and Netflix.

Corporate Bonds. Corporate bonds are having a good year, rising 6.2%. They have risen 26% for the past decade. Companies in this category typically have strong balance sheets. A few quality names in this sector include Anheuser-Busch, Microsoft, Apple, and Oracle.

Gold. Gold typically does well when investors or scared or there is a hint of inflation. This year gold has risen 18%, and over the past decade, it has risen 42%.

Commodities. A commodity index includes gold, oil, sugar, soybeans, corn, copper, zinc, silver, etc. It has been a challenging decade for commodities, losing 14%. This year it is up 7% rising on the strength of gold, silver, and copper.

Your portfolio may include some of these components. At the start of this year, it would have made sense to allocate 100% of your assets to large-cap growth companies, but it’s not possible to know, in advance, which sector will outperform the others. For example, from 2000 to 2010, the large-cap growth index lost 49%, while emerging markets rose 102%.

So, is the market in a bubble? It depends on the market, of course. One of the best ways to protect your assets is to own a diversified portfolio of low-cost funds and rebalance them as needed. Rebalancing your accounts will keep your asset allocation and risk level intact.

Rather than worrying if we’re in a bubble and trying to time your buys and sells, focus on your goals, think long-term, and let the stock market help you create generational wealth.

History shows us, over and over, that bull markets can go well beyond rational valuation levels as long the outlook for the future earnings is positive.” ~ Peter Bernstein

July 11, 2020

Bill Parrott, CFP®, 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

The data source for the investment categories, names, and returns come from YCharts.

[1] https://www.marketwatch.com/story/the-latest-sign-of-a-stock-market-bubble-small-companies-claiming-to-disrupt-large-industries-2020-07-06, by Nigam Arora, July 7, 2020

What if?

If you have children, you probably answered a million what-if questions. What if the sky falls? What if dogs talked? What if I wear my clothes backward? What if I eat my soup with a fork? What if I become a horse?

What if?

Investors are asking quite a few what-if questions because of the current economic environment and the healthcare crisis — questions with few answers.

Let’s explore some what-if questions.

What if stocks crash? Stocks crash often. According to J.P. Morgan Asset Management, there have been several significant market declines. Stocks fell 86% during the Great Depression. They fell 49% during the tech-wreck in 2000. The S&P 500 fell 53% from 2007 to 2009, and most recently, it fell 34% because of COVID-19. J.P. Morgan highlighted 13 bear markets in their Guide to the Markets® third-quarter outlook. The average drop was 42%, and the downturns lasted for 22 months.[1] From March 2009 to July 2020, the S&P 500 Index has risen 366%, but it closed in negative territory 42% of the time. During this bull-market run, the index dropped more than 10% on several occasions. It fell 16% in 2011, 11% in 2016, 17.5% in 2018, and 34% in March 2020.[2]

What if there is a recession? Since 1900 the U.S. has weathered twenty-four recessions or about once every five years.[3]

What if interest rates rise? The Federal Funds rate jumped from 4.24% in 1970 to more than 20% in 1981. Interest rates climbed to 6.5% in 2000, and from 2000 to 2007, they soared from 1% to 5.25%.[4]

What if there is inflation? The inflation rate in 1920 peaked at 23.5%. After WWII, it touched 19%. In 1980 it spiked to 14%. The 106-year inflation rate has averaged 3.23%.[5]

What if stocks don’t rise? Stocks go nowhere often. During the Great Depression, stocks eked out an average annual return of 1.7% for fifteen years from 1929 to 1944. Stocks produced an average yearly return of .9% from 1973 to 1978. From 2000 to 2012, the market generated an average annual return of 1.7% during the Great Recession.[6]

What if there is a war? The United States has been involved in several wars or conflicts: WWI, WWII, Korea, Vietnam, Iraq, and Afghanistan, to name a few.

What if there is another pandemic? In addition to COVID-19, there have been several global epidemics – the bubonic plague, typhoid, yellow fever, Spanish flu, pneumonic plague, cholera, smallpox, HIV/AIDS, Ebola, MERS, SARS, measles, H1N1, mumps, the flu, and so on.[7]

What if a Republican wins the election? The average annual return with a Republican president in the White House has been 8.6%.[8]

What if a Democrat wins the election? The average annual return with a Democrat president in the White House has been 8.8%.[9]

Despite crashes, recessions, depressions, wars, pandemics, rising interest rates, inflation, and elections, the stock market marches higher. In June 1920, the Dow Jones Industrial Average closed at 90.76. Today, it is 25,832 – a gain of 28,361 percent! The 100-year average annual return for stocks is 10%.

It’s possible to ask more what-if questions about investing, but what’s the point? It’s impossible to know what’s going to happen tomorrow, so don’t try to outsmart the market. It’s a waste of time, energy, and resources. Instead, focus on what you can control, like your spending and your savings.  A financial plan can help you focus and prioritize your goals. It will help you determine your investment allocation and other important decisions. Once your plan is completed, invest in a diversified portfolio of low-cost index funds, and hold them forever.

“Life can only be understood backwards; but it must be lived forwards.” ~ Søren Kierkegaard

July 3, 2020

Bill Parrott, CFP®, 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] J.P.Morgan Asset Management Guide to the Markets® U.S.|3Q 2020|As of June 30, 2020.

[2] YCharts

[3] J.P.Morgan Asset Management Guide to the Markets® U.S.|3Q 2020|As of June 30, 2020.

[4] https://www.macrotrends.net/2015/fed-funds-rate-historical-chart, website accessed July 2, 2020

[5] YCharts

[6] Dimensional Fund Advisors 2019 Matrix Book

[7] https://en.wikipedia.org/wiki/List_of_epidemics

[8] https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-returns-and-elections

[9] Ibid