Risk Management

Today I woke up to an inch of water on the floor due to a busted pipe from the Austin freeze.  We caught it early, shut off the water, and limited the damage. Despite shutting off our water, we’re lucky because we have electricity, a backup water supply, and food in the pantry. Others in our city are less fortunate.

Risk happens fast, and fortunes can change quickly. During a raging bull market, investors want to own the story stocks, the high-flyers. When a stock is mentioned on CNBC, Twitter, Reddit, or any social media outlet, investors buy it despite knowing little about the company. As stocks rise, some question the wisdom of diversification or the benefit of owning bonds. At some point, markets correct, and your diversified portfolio will limit your downside.

Stock market corrections are normal. Preparing for a pullback will allow you to take advantage of it and buy the dip. Bonds act as a buffer or a source of funds. They typically rise when stocks fall because investors are looking for a refuge. During the COVID correction, the S&P 500 fell more than 30%, while intermediate bonds dropped about 5%, and short-term bonds rose 2%.

Building an all-weather portfolio is your first line of defense against a risk event. It’s impossible to plan for every catastrophe, so don’t try. Rather, allocate your assets to stocks, bonds, and cash to minimize risk. Of course, there are trade-offs. If you own a large amount of bonds and cash, it will be safe, but it will mute your growth. If your allocation to stocks is high, you’ll experience larger drawdowns, but your long-term growth rates will be higher. Finding a balance between the two is part art and science.

Here are a few suggestions to safeguard your investments.

  • Have a financial plan. Before the storm hit, my wife and I had a plan. When disaster struck, we sprung into action. A financial plan allows you to act on facts, not emotion. It will be your financial emergency rescue kit.
  • Diversify your investments across size, sector, and class. Invest in a basket of globally diversified funds to give you exposure to multiple asset classes.
  • Rebalance your account. An annual rebalance will reduce your risk and maintain your asset allocation.
  • Invest in cash if you need the money in one year or less. A cash hoard allows your stocks time to recover. If you have cash on the sidelines, you won’t need to sell stocks when they fall.
  •  Invest in cash and bonds if you’re going to buy a home, a car, or pay tuition. If you need money for a large purchase, buy bonds or keep your money in cash so it’s safe and secure.

Risk and reward are linked. To capture high long-term growth rates, you need to take risks. The stock market rises about three-quarters of the time, and a quarter of the time, it falls. Welcome the corrections. A declining market allows you to buy quality companies at discounted prices. When the market recovers, you’ll be thankful you had the courage to buy when others were selling.

Be safe and happy investing.

“I always tried to turn every disaster into an opportunity.” ~ John D. Rockefeller

February 17, 2021

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.

Single Track

When I ride my mountain bike, I take calculated risks, or I used to anyway. I’ve ridden down mountains on beaches and through state parks. Riding down the Flume Trail in Lake Tahoe was a favorite. I’m not an overly aggressive rider, but I hold my own.

As my daughter was growing up, we went on long bike rides on the Linear Trail in Cheshire, Connecticut. She was perched behind me, tucked safely in her bicycle seat. I rode the bike carefully when she was a passenger, and we did not do anything crazy because I didn’t want to fall or put her in harm’s way. I had a duty to take care of her and bring her back home safely to her mother.

As an investor, I invest aggressively in my account. I take risks. If I suffer a loss, I analyze the trade, lick my wounds, and move on to the next investment. I don’t spend too much time worrying about the loss. Nor do I get upset if I sell too early. Over the past thirty years, I purchased many stocks late and sold them way too early. I don’t spend too much time pondering the woulda, coulda, shoulda.  

As a fiduciary, I take risk management seriously because it’s not my money. I ache when I sell an investment for a loss for a client. It hurts to realize losses for others. Like riding my bike with my daughter, my goal as an asset manager is to deliver a client to their desired destination. It’s my job to listen to their hopes, dreams, and fears and invest accordingly. I must act on their wishes – to a degree. If a client wants to invest in something counter to their goals or plan, I might say no, particularly if it may harm them financially.

We utilize financial planning to help us manage money for our clients. A financial plan determines the best path to pursue; it’s a financial trail map. How aggressively do we invest? Do we take on additional risk, or less? How much income do they need? The plan can answer our questions. During the COVID correction last March, we stress-tested accounts in real-time. Our financial plans gave us the courage to remain invested and our clients the peace of mind to ride out the storm.  Our risk management system worked.

An African proverb says, “If you want to go fast, go alone. If you want to go far, go together.” My goal is to embark on a long-term journey with our clients. We want to make sure they don’t run out of money in retirement – a worthy goal. To ensure we meet this goal, we prudently utilize a basket of low-cost, globally diversified funds. The portfolios are built for distance, not for speed – designed for the long haul. Our moderate model ETF portfolio returned 13.25% last year, an excellent return when judged on its own merits. However, we could have gone faster if we invested in the NASDAQ 100, QQQ. It was up 49%. But we could have invested in the ProShares Ultra Bloomberg Crude Oil (UCO) ETF, which fell 83%. Hindsight is 20/20. Risk and reward.

Calculated risks are essential to life and investing. Knowing your comfort zone as an investor is paramount. If you’re comfortable and confident with your holdings, you’re more likely to remain invested for the long-term, where you have an opportunity to create generational wealth.

Happy investing, and enjoy the journey.

Get a bicycle. You will certainly not regret it, if you live. ~ Mark Twain

February 16, 2021

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.

Red 32

I like gambling – always have. My high school was located across the street from Santa Anita Race Track in Arcadia, and my friends and I often went after school to bet on a race or two. On some Saturdays, we’d spend all afternoon at the track. In college, my friends and I traveled to Las Vegas or South Lake Tahoe to play blackjack, craps, or some other games. It was fun and exciting; however, I never risked more than I could afford to lose, which wasn’t much.

Since the start of COVID, investors have been gambling on stocks buying speculative names, or using options to leverage their bets. Options volume on the CBOE for calls has increased 247%. To add fuel to the fire, speculators have leveraged their accounts with margin. Since last March, margin debt has increased 63% to a record high of $778 billion!

The trading activity in speculative names and options has increased because of the Robinhood traders, Reddit, and WallStreetBets. John Marshall, head of derivatives research at Goldman Sachs, said, “For the largest online brokers, the number of daily trades has tripled since 2019. But this has mainly been driven by a small portion of their customer base. These day traders are less than 10% of their customers, but they represent more than half of their trades.”[1]

Sundial Growers (SNDL) is the latest example of this craze. After the social media crowd said to buy the stock, it jumped 144% in a few days, and volume spiked 730% as traders poured into it at the top before falling 32%. Dave Portnoy said on Twitter, “Back in $sndl cause I love the rush.” He added: “The $SNDL saga has convinced me you should have to pass an intelligence test to use Twitter.”

So far, GameStop is the poster child for speculation rocketing from $18 to $483 in two weeks before crashing. It’s now down 90% from the high, and the volume in the stock spiked 489% as speculators chased returns.

Here a few suggestions if you want to speculate.

  • Limit your speculative capital to 1% to 3% of your taxable investment account. Do not use retirement funds to buy penny stocks, call options, or meme stocks.
  • Do not use margin.
  • If you make a quick buck, take your gains and count your blessings.
  • If you’re losing money, cut your losses. Do not average down.
  • If a stock has risen 500% or more in a few days, wait for it to pull back before you decide to take the plunge. Stocks can’t remain vertical for long, and beware of parabolic charts.
  • Do your own research. Ignore your brother-in-law’s advice.
  • Only speculate with money you can afford to lose.
  • Beware of the wash rule.
  • If you suffer losses, you can write them off your taxes indefinitely until absorbed. The IRS allows you to write off $3,000 per year if you don’t have any capital gains. You can offset your losses dollar for dollar against any capital gains.
  • John Maynard Keynes said, “The market can remain irrational longer than you can remain solvent.”
  • You’re competing against Goldman Sachs, Morgan Stanley, American Funds, Dimensional Funds, BlackRock, Vanguard, Fidelity, Schwab, TD Ameritrade, Renaissance Technologies, and several thousand professional investors with deep pockets. Plan accordingly.

Happy trading and good luck.

“Gambling has brought our family together. We had to move to a smaller house.” ~ Tommy Cooper

February 12, 2021

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.


[1] https://markets.businessinsider.com/news/stocks/retail-reddit-robinhood-trading-boom-means-for-stocks-goldman-sachs-2021-2-1030051688, By Isabelle Lee, February 7, 2021

I Want A Correction

Stocks have been on a tear since the March COVID pullback, rising 103%! Several companies have soared more than 500%, including Tesla, Nautilus, Tupperware, and Moderna. ARK Funds, led by Cathie Wood, had three funds rise more than 170%. And don’t get me started on Bitcoin, Gamestop, or the Reddit traders. Despite the outperformance from a few sectors, I’m hoping we get a correction, and the sooner, the better.

Why do I want a correction? Am I violating my fiduciary duty if I wish for stocks to fall? After all, investors fear losing money or getting wiped out as they did in 1929. For some, it is their worst nightmare. I’m often asked when stocks will fall, and some people only call me when their account is down. Despite their concerns, I have not met anybody who has lost all their money from investing, especially if they own a globally diversified portfolio of stocks, bonds, and cash. Despite concerns about a correction, they’re normal and healthy.

By several metrics, the market is expensive. Shiller’s CAPE ratio is 34.7, the second-highest reading in 140 years.[1] The previous high was February 2000, before the Tech-Wreck, where stocks fell 49%. Tobin’s Q metric is at its highest level in 76 years. The previous high? February 2000.  Value Line’s three to five-year growth potential for stocks is 35% – a low number. Last March, their indicator touched 145% before stocks rose more than 100%. Last, the dividend yield for the S&P 500 is at its lowest level in two decades, 1.57%. In February 2009, it touched 4% when stocks bottomed following the Great Recession.

My anxiety rises when stocks enter the feeding-frenzy phase as they are now, and like they were in 1999. Social media is fueling the fire as some investors pick stocks based on memes or rocket emojis. It appears easy to make money trading stocks or options with a few clicks of the mouse, but it’s not the case. Yes, you can get lucky if you jump on the bandwagon at the right time, but over time, valuations matter – research matters. Price matters.

I look forward to corrections because I can buy great companies at lower prices. When stocks fall, investors panic. They don’t hold the line, and their diamond hands turn weak. A bear market is where you get the best prices. Also, during a correction, you will have little competition to add quality names to your portfolio. Others will think you’re crazy for buying stocks during a market meltdown, but if you want to create generational wealth, you need the courage to buy when others sell and sell when others are buying – short-term pain for long-term gain. Buy low and sell high.

Of course, stocks can rise forever and can remain overvalued for years. No one knows when the next correction will come, including me. But when it does, welcome it with open arms and a blank check. A friend once told me, “If you’re upset that your stocks are down and you want to throw a brick through my office window, tape a check to it because it’s probably a good time to buy!”

Some of my best purchases occurred during the depths of a bear market, including Amazon, Google, Microsoft, Disney, and Pepsi. During the Great Depression, Sir John Templeton bought 100 shares of every company trading below $1 per share. Most of the companies he purchased lost money, some remained stagnant, and a few were big winners. His strategy made him a billionaire.[2]

How can you take advantage of a correction? Here are a few ideas.

  • Create a shopping list of companies or funds you want to own.
  • Keep your powder dry, and move some cash to the sidelines and wait for stocks to fall, and then pounce on your best ideas.
  • Diversify your assets. A globally diversified portfolio of funds will limit your downside when stocks fall. Allocating money to bonds, international stocks, or alternative assets is a prudent investment strategy.
  • Rebalance your accounts. Our models were rebalancing some accounts weekly during the March correction because the volatility was off the charts. Our models initially rotated from bonds to stocks because we were selling expensive assets (bonds) to buy cheap ones (stocks). As the market rebounded, our models rotated through all our asset classes.
  • Sell your winners now as stocks trade to all-time highs. Lock in some profits.
  • Write options (sell calls) against stocks you own to generate income and potentially sell at a higher price.
  • Write options (sell puts) on companies you want to own at a lower price. Selling a put below the stock price allows you to generate income and potentially purchase your company at a lower price.
  • Be patient and wait for bargains. Do not chase stocks and fight the urge to follow the crowd.

I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful. ~ Warren Buffett.

February 11, 2021

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.


[1] Ycharts – 1881 to 2021.

[2] https://en.wikipedia.org/wiki/John_Templeton

Rising Rates

Interest rates are rising. Year to date, the yield on the US 30-Year Treasury bond is up 24%, and from the July low, it has risen 75%. Though rates are near historical lows, they can rise quickly. When rates rise, bond prices fall, and at some point, they will threaten stocks as investors search for decent returns with less risk. Interest rates remained below 5% from 1875 to 1966 before climbing to 15% in October 1981.[1] The 146-year average is 4.52%.

I don’t anticipate rates to approach 15%, but small, upward movements can damage a bond portfolio. A 30-year bond will fall by 19.5% if rates rise 1%. The iShares 20+ Year Treasury Bond ETF (TLT) is down 5.2% this year. Rising rates are not all bad, however. Individuals with large cash balances should see their rates rise on their accounts.

How can you protect your portfolio or take advantage of rising interest rates? Here are a few suggestions.

  • Deposit more money to a money market fund. The rate of interest you earn on your money market fund will increase without lowering your fund’s price.
  • Invest in short-term US Treasuries or CDs with maturities of six months or less. The short term duration will allow you to capture higher rates when they mature.
  • Invest in a bond ladder with maturities of one year or less.  A recommended bond ladder is to purchase US treasures with three-month maturities, so bonds come due at 3-, 6-, 9-, and 12- months. This ladder gives you liquidity and flexibility.
  • Sell your long-term bonds with maturities of twenty to thirty years. If you own long bonds, you probably have significant gains. Sell your bonds, lock in your profits, and buy shorter-dated bonds. However, if you need the income from your bonds, don’t sell. I know it’s a contradiction, but one is a risk reduction strategy, the other is an income strategy.
  • Buy a bond fund with a duration of one to five years. The short-term holdings in the funds will fare better than long-term securities if rates rise.
  • Purchase high-quality corporate bonds. Corporate bonds offer higher rates than CDs or treasuries because they are not guaranteed.
  • Invest in tax-free municipal bonds with short-term maturities. In addition to protecting your assets, you will receive tax-free income. If tax rates rise, your after-tax rate will increase. For example, a 3% taxable bond equates to a 4.76% bond for individuals in the 37% tax bracket.  
  • Purchase an inflation-protected bond fund. The iShares TIPS bond ETF (TIP) is up 8% over the past year.

Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is very low gravitational pull on asset prices. ~ Warren Buffett

February 10, 2021

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.


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

Is This Time Different?

GameStop stock soared to all-time highs last week on the wings of social media traders. The Reddit traders put the short squeeze on GME and almost destroyed two high profile short-selling firms. At one point, GameStop had risen more than 1,600%! On Twitter, Reddit Investors said, “It is the common man vs. the suits.” They added, “I’ve talked to a lot of suits this weekend, and 90% of them are extremely concerned this debacle with meme stocks is going to blow up the market in the near-term.”

As the social media warriors tried to “stick it to the man,” trading on the Robinhood app exploded, and  Wall Street made even more money. Citadel is the primary trader for Robinhood and other firms, and last year they made $6.7 billion trading “free” stocks.[1] The more individuals trade, the more money Wall Street makes. One former Wall Street veteran told me: “We are in the moving business, not the storage business.” Wall Street loves activity, and it doesn’t care about your moral victories or if you want to “hold the line.” Since GME peaked last Thursday, it has dropped 80%. John Maynard Keynes said, “The market can remain irrational, longer than you can remain solvent.”

Is it true? Will a group of day trading, social media experts bring down Wall Street? Let’s review some history.

The Crash of 1929

The roaring twenties was a decade of excess, showcased by F.Scott Fitzgerald’s The Great Gatsby. The era was ripe for speculation following the Spanish Flu, and traders bid up stocks by leveraging their accounts ten to one. According to Macrotrends, the Dow Jones Industrial Average climbed 449% from 1921 to 1929.[2] Towards the end of the bull market, several high profile stocks like Anaconda Copper, GE, GM, Montgomery Ward, New York Central, RCA, Westinghouse, and Woolworth rose an average 158% from March 3, 1928, to September 3, 1929. Less than two months later, the group fell 73% as the stock market crashed on October 29, 1929.[3] After the crash, the government established the Securities and Exchange Commission to protect individual investors. The Dow Jones did not breach its pre-crash high until 1959, thirty years later!

The Nifty-Fifty

The nifty-fifty was a group of large companies that investors loved to own during the 1960s and 1970s. These momentum stocks were made popular by the legendary investor George Tsai who managed the Fidelity Capital and Manhattan Funds.[4] The nifty-fifty stocks traded to excessive valuations, and the PE ratio for these stocks climbed to more than 100. A few of the names included Coca-Cola, IBM, Polaroid, and Xerox.[5]The party ended during the market correction of 1973 and 1974 when stocks fell more than 40%. The Dow Jones declined 71% from 1965 to 1982, and It would take fourteen years for the Dow to eclipse its 1965 top.[6]

The Tech Wreck

Technology stocks soared during the mid-nineties as the internet brought elaborate trading tools to the masses. The internet turned individuals into trading machines with access to websites managed by E*Trade, Schwab, and TD Ameritrade. If you need proof of the excess, please Google E*Trade investment commercials.  From January 1995 to February 1, 1999, the Dow climbed 144%, and the NASDAQ soared 233%. Stocks like Qualcomm, Enron, Iomega, Worldcom, Global Crossing, and pets.com mesmerized day traders. A new paradigm arrived until the market corrected. The NASDAQ tumbled 70%, and the Dow Jones fell more than 32%. The tech-wreck brought the party to a halt. It took the NASDAQ more than fifteen years to recover its all-time high!

Today

Boom and bust cycles are part of investing. Pursuing quick riches through day trading is fleeting, and it only lasts a few years, at best. It took the stock market an average of nineteen years to recover the losses from the Great Depression, Nifty-Fifty correction, and Tech Wreck.

Is this time different? I doubt it. Individuals who trade without a plan to chase short-term riches will suffer when the market corrects. Long after the GameStop fiasco is over, large Wall Street firms like Goldman Sachs, Morgan Stanley, and Citadel will still be standing.

Be careful. Trade lightly.

“The four most dangerous words in investing are: ‘this time is different'” ~ Sir John Templeton

Book Recommendations

This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff

Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger

Irrational Exuberance by Robert J. Shiller

Against The Gods by Peter L. Bernstein

Barbarians at the Gate by Bryan Burrough

The Big Short by Michael Lewis

The Panic of 1907 by Robert F. Bruner

February 2, 2021

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.


[1] https://www.wsj.com/articles/gamestop-frenzy-puts-spotlight-on-trading-giant-citadel-securities-11612089000?mod=searchresults_pos4&page=1, Alexander Osipovich, January 31, 2021

[2] https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

[3] Only Yesterday by Frederick Lewis Allen

[4] https://en.wikipedia.org/wiki/Gerald_Tsai

[5] https://www.investopedia.com/ask/answers/08/nifty-fifty-50.asp ,Barclay Palmer, March 24, 2020.

[6] https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart