I like math. It’s pure and definite; the answers are indisputable. In junior high and high school, I had spirited conversations with my English teachers because our interpretation of events differed considerably. It was my opinion against theirs, and they frequently won because they were grading my papers. However, I always felt a little cheated because if they didn’t like my topic or handwriting, they’d knock me down a notch or two. One teacher didn’t like athletes, so she was upset when I turned in a book report on Roberto Clemente. On the other hand, my math teachers evaluated my work based on facts and time-tested formulas, which made sense.
Opinions, guesswork, and assumptions run rampant on Wall Street, especially in the absence of facts. Without facts, individuals create a story that is often wrong. Convinced the market would fall if Biden won the election, investors sold stocks. Others felt COVID would continue to drive stocks down in value. But, since election day, the Dow Jones Industrial Average is up almost 8%. Helping propel the Dow higher is news from Pfizer that they may have found a vaccine for COVID. Short-term thinking is an investor’s worse enemy.
A bit of market knowledge may help you stay invested during times of turmoil and ambiguity. Here are a few facts.
- Individuals who complete a financial plan have three times the assets of those who do little or no planning.
- Stocks outperform bonds. The 93-year average annual return for common stocks has been 10.2%, while long-term government bonds returned 5.6%. A $1 investment in large-company stocks is now worth $9,237, while $1 invested in bonds is worth $175.
- Small-company stocks outperform large-company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.2% from 1928 to 2019. A $1 investment is now worth $90,337. The Dimensional Large-Cap Value Index averaged 11.2%. A $1 investment in this large-cap index is now worth $17,219.
- Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% comes from market timing and investment selection.
- Passive index investing is better than active stock picking. The Standard & Poor’s passive v. active study reveals that over 15 years, 95% of active fund managers fail to outperform their benchmark, also the case for 1, 3, 5, and 10 years.
- Lower fees are imperative. Less is more. Your advisor should provide you a list of charges for their services, including the investments they offer. If your advisor is charging you more than 1% of your assets, a high hourly rate, or a monthly retainer, you may need to make a change.
- Working with an investment advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns. An advisor can help with financial planning, estate planning, investment planning, charitable planning, and much more.
- US stocks rise about 75% of the time. Since 1926, the S&P 500 has risen 69 times and fallen 25.
- Since 1926, inflation has averaged 2.9%, and US T-Bills have returned 3.3% per year. Your net return, before taxes, has been .4%.
- The stock market always recovers. In March, the Dow Jones was down 37%, falling to 18,591. Today it’s approaching 30,000 – a record level.
To create generational wealth, own stocks, overlook short-term moves, focus on facts, ignore conjecture, and good things will happen.
“These are the facts of the case – and they are undisputed.” ~ Kevin Bacon, A Few Good Men
November 9, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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.
 Dimensional Funds 2020 Matrix Book.
 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.