Month: April 2022

Invest Like a Stoic

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Stoics would have made great investors because they focused on issues they could control. Marcus Aurelius, Epictetus, and Seneca would probably have much to say about today’s markets or, more importantly, investor’s reactions to the performance of stocks and bonds.

Stocks and bonds face strong headwinds from inflation, rising interest rates, COVID, the supply chain, and the war in Ukraine. These areas are causing heartache among investors as global markets crumble. Yet, we can’t control the outcome of these worldly events.

What can you control? As an investor, you can control your spending and savings; that’s about it. If you reduce your spending, you can increase your savings, and the more you save, the better. Of course, if your spending rises, you may have to reduce your savings.

Here are a few tips to help you manage your assets and emotions.

  1. Automate your expenses by depositing your paycheck and paying your bills. Automation simplifies your life and helps you avoid late fees and penalties.
  2. Automate your savings. Automate your investment accounts after setting up your 401(k) plan. Link your checking and savings account to build up your emergency fund. Transferring dollars monthly from checking to savings gives you access to the funds while increasing your emergency reserves.
  3. Buy the dip. If you automate your savings, you can buy the dip without emotion. It’s hard to buy stocks when they fall, but you can eliminate this fear through automation.
  4. Do not check your accounts. If you review your accounts daily, try doing it weekly. If you review them weekly, try doing it monthly. If you review them monthly, try doing it annually. The less you look at your investments, the better, especially if you own a diversified portfolio of low-cost funds.
  5. Manage your time horizon. If you need access to your funds in one year or less, deposit your money in money market funds, CDs, or T-Bills! If your horizon is three to five years or more, buy stocks.
  6. Build a financial plan. A financial plan guides your financial future and quantifies your hopes, dreams, and fears.

You can control your savings, spending, and outlook, but you can’t control inflation, interest rates, or world war. Despite these recurring issues, stocks rise more than they fall.

From 1926 to 2021, the stock market has risen 75% of the time.[1]

Best five years:

  • 1933 = up 56.7%
  • 1954 = up 50%
  • 1958 = up 45%
  • 1935 = up 44.4%
  • 1975 = up 38.8%

Worst five years:

  • 1931 = down 43.5%
  • 2008 = down 36.7%
  • 1937 = down 34.7%
  • 1930 = down 28.8%
  • 1974 = down 27%

A key takeaway is that the best years follow the worst years; sharp down days precede strong up days, and risk and return are linked.

I don’t know when stocks will recover, so follow your plan and focus on what you can control.

We control our reasoned choice and all acts that depend on that moral will. ~ Epictetus

April 26, 2022

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                                     

[1] The Rewarding Distribution of US Stock Market Returns – Dimensional, 1926 to 2021

Do You Suffer from Occupational Burnout?

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People are fried. After two years of COVID, the Ukraine War, unaffordable homes, and a stock market correction, people are sick and tired of being sick and tired. I’m a financial planner, not a therapist, but sometimes I feel more like Frasier Crane than Peter Lynch.

Talking to a financial planner is to bear your financial and emotional soul. It’s not easy for people to reveal their financial secrets or status. Since I started my firm in 2015, we have completed more than 140 financial plans reflecting hundreds of millions of dollars. The two questions people often ask are: When can I retire? Will I run out of money?

Because of COVID, we generated several standalone plans to help people who want to change jobs, move to the country, or travel the world. These people are tired of their daily grind and want to pursue their hobby or passion, and they want to close out the second half of their career with a purpose.

A financial plan can help you decide if you’re financially ready to leave your 9 to 5 job to pursue your dreams. Are you ready to start a new business? Do you want to work for a non-profit? Can you expand your hobby to generate income? Your plan can answer these questions and many more.

I have often said there are two sides to financial planning. On one side, it’s all about the numbers. Will your assets support your lifestyle when your retire or change careers? In this case, the numbers dictate your decision. It’s a binary answer – yes or no. On the other side is the emotional piece. Are you ready to leave your day job to pursue your dream? Do you have the self-control to leave a steady paycheck behind? Can you handle economic uncertainty? A well-constructed financial plan will mend these two sides together to give you the confidence to forge ahead.

If you’re unsure where to start, you can visit the Certified Financial Planners website to learn more about the profession and services. You can also search for a planner in your area. Here is a link to their website. https://www.cfp.net/

When I started my career three decades ago, I developed a rudimentary financial plan for a client. A few days after we finished it, she called to ask if she could afford a new car, and I told her she could buy two! The plan gave us confidence that her car purchase would not derail her financial future. And thirty years later, her account is still going strong.

If you want to try something new, give it a go. What do you have to lose? If you wish to fortify your odds of success, start with your financial plan. After all, you don’t want to lie on your death bed wondering what if.

I’m listening.

It’s better to look ahead and prepare, than to look back and regret. ~ Jackie Joyner-Kersee

April 23, 2022

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.

Can You Lose All Your Money?

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Stocks and bonds continue to plummet, and there appears to be no end to the misery. The S&P 500 is down 9.6%; bonds have dropped 9.8%. As bad news mounts, can you lose all your money from stocks or bonds? The odds are pretty low if you diversify your assets across classes, sectors, and countries.

Since 1926, a 60% stock and 40% long-term government bond portfolio averaged 9.16% per year, but it has not been without blemishes. During the Great Depression, it lost 45%, and in 1974 it fell 14.13%, it dropped 11.85% in 2008.

You can reduce your risk and downside By adding more components to your portfolio. Adding small-cap stocks, international holdings, and real estate investments to a portfolio decreased the downside from 44% to 36%.

Here is a look at some asset categories and their worst investment years.

  • Large-cap stocks lost 66% in 1932.
  • Small-cap stocks lost 67% in 1932.
  • Mid-cap stocks lost 43% in 1982.
  • International small-cap stocks lost 53% in 1985.
  • International developed stocks lost 50% in 1985.
  • Emerging markets lost 51% in 2009.
  • Real estate holdings lost 61% in 2009.
  • Government bonds lost 4.5% in 1981.

As I mentioned, the 60/40 portfolio lost 45% during the Great Depression, but from 1932 to 1936, it rebounded by 91%. After the 1974 decline, it climbed 47% from 1975 to 1976, and it soared 102% from 2009 to 2017 following the Great Recession.

Will you lose all your money from a diversified portfolio of mutual funds or ETFs? I doubt it. Actually, if history is our guide, buying investments when they’re down has been financially rewarding if you are patient.

I don’t know when stocks and bonds will recover, but it will happen eventually. In the meantime, follow your plan and diversify your assets.

April 221, 2022

www.parrottwealth.com

Note: Past performance is no guarantee of future performance.

Data Sources: Dimensional Fund Advisors Returns Web and YCHARTS.

Should You Sell Your Losers?

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Bill Ackman, founder, and CEO of Pershing Square, recently realized a $400 million loss after liquidating the firm’s Netflix position, which he purchased in January.[1] After Netflix reported earnings, the stock fell 35%. It currently trades for $218.24 per share, down 68% from its peak.

Pershing Square manages approximately $18.5 billion in assets, and the Netflix loss represents about 2% of the firm’s assets. No one likes to lose money, but cutting your losses and limiting your downside is wise, especially if you lose faith in the company.

The S&P 500 is down 6.44%, a challenging year, as market participants react to rising inflation, higher interest rates, and war in Ukraine. Several stocks are down 40%, 50%, and 60%, including Etsy, PayPal, Fubo TV, DocuSign, NIO, Uber, Spotify, Zoom, etc. What should you do if you own a loser or two?

My recommendation is to follow Mr. Ackman’s lead and sell your losers. Though he lost $400 million on Netflix, his firm generated stellar returns in 2021, so he probably can offset the gains with his loss. You can do the same thing. For example, if you own Vanguard’s 500 Fund (VOO), you can sell it to realize the loss and buy iShares Core S&P 500 ETF (IVV). You can recognize the loss and establish a new position in a similar security.

Bonds are performing poorly as well. The Bloomberg US Aggregate Bond Index is down 9.85%, matching its worst year from April 1979 to March 1980.[2] If you own the iShares Core US Aggregate Bond ETF (AGG) sell it to buy Vanguard’s Total Bond Market ETF (BND).  

When should you realize your loss? My answer is before a modest loss becomes a large one. Some investors wait until the end of the year to recognize losses, but then they miss out on opportunities to recoup losses or offset gains. We realized  losses during the COVID correction in March 2020 through our rebalancing software and individual trades. As the market rebounded, we absorbed the losses with  gains.

Be careful, however, if you want to buy back one of your losers. If you still like PayPayl but want to realize your loss, you must wait thirty-one days before repurchasing it to avoid the wash sale rule.

Investment losses are a fact of life; you’re not going to win on every trade, so when a loss occurs, use it to your advantage – never waste a good tax loss.

Happy Trading.

April 22, 2022

www.parrottwealth.com

Note: Past performance is no guarantee of future performance.

[1] https://www.wsj.com/articles/william-ackmans-hedge-fund-sheds-stake-in-netflix-11650498903, Gunjan Banerji, April 20, 2022.

[2] YCHARTS and Dimensional Funds Returns Web Tool

My Investment Shopping Cart

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Peter Lynch, the legendary portfolio manager of the Fidelity Magellan Fund,  said, “Buy what you know.” As a result, I created my shopping cart investment portfolio consisting of twenty companies my family and I use often. And, like a regular shopping experience, I substituted some products because others weren’t available. My local grocery store is privately held HEB, so I added Kroger as a replacement.

Here are the companies in my shopping cart:

  • Alphabet
  • Amazon
  • Anheuser-Busch
  • Apple
  • AT&T
  • Clorox
  • Coca-Cola
  • Costco
  • General Mills
  • Home Depot
  • Honda Motor
  • Johnson & Johnson
  • Kroger
  • Netflix
  • P&G
  • Starbuck’s
  • Target
  • Twitter
  • UPS
  • Walgreen’s

The portfolio is down 4.62% year-to-date, while the S&P 500 has lost 6.04%. Last year, it was up 19.79%, and the S&P climbed 28.71%. Over the past 3-, 5-, and 10-year periods, the shopping cart portfolio has averaged 17%, slightly ahead of the S&P 500, which returned 16%. The current yield for the portfolio is 2.18%.

The shopping cart portfolio has captured 96% of the upside and 74% of the downside for the past decade, relative to the S&P 500. The capture ratio is 1.29, outperforming the market.

Shopping cart full of food isolated on white. Grocery and food store concept. 3d illustration

If you’re looking to cook up a sizzling portfolio, throw some household names in your shopping cart.

April 21, 2022

www.parrottwealth.com

Note: Past performance is no guarantee of future performance.

The Middle Child

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Being the middle child is tough; ask Jan Brady, Lisa from the Simpsons, or Malcolm in the Middle. Most of the attention falls on the firstborn child or the family’s baby. Mid-cap stocks suffer the same fate because investors want to own large-cap or small-cap stocks.  

Since 1980, mid-cap stocks have outperformed the S&P 500, generating an average annual return of 12.72%. The returns have been higher than large caps, but the downside has been similar. From July 1982 to June 1983, the mid-cap index soared 82%, whereas the S&P 500 rose 61%. During the Great Recession, both fell by 43%.[1]

Mid-cap stocks make an excellent portfolio choice because they survived the startup and small-cap phase, but they still have room to grow. Some popular mid-cap companies include Kroger’s, Dollar Tree, RH, Dick’s Sporting Goods, and Skechers.

The Dow Jones US Mid Cap Index has been up 215% over the past ten years, producing an average annual gain of 12.14%, similar to its 40-year average annual return.

Consider mid-cap stocks if you want to give your portfolio a boost.

April 20, 2022

www.parrottwealth.com

Note: past performance is not a guarantee of future performance.

[1] Dimensional Funds Returns Web – January 1, 1980 to March 31, 2022

Small Things      

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Good things come in small packages, which is true for small company stocks. Since 1972 Dimensional Fund’s small-cap index has more than doubled the return of its large-cap index, generating an annualized return of 12.7%, compared to 10.9% for large caps. The index returns date to 1927, and the best one-year return was 259% during the Great Depression. During the first phase of COVID, the small-cap index produced a 107% return from April 2020 to March 2021.[1] Though returns for small stocks have been better than larger ones, so has the risk level.

However, large-company stocks have outperformed small caps over the past 1-, 3-, 5-, and 10-year periods.

Will large companies continue to best small ones? Will the trend continue? Time will tell, but I believe small-cap stocks will again post better returns than large-caps as they have done for the past 95 years.

April 19, 2022

www.parrottwealth.com

Note: past performance is not a guarantee of future performance.

[1] DFA Returns Web – 1927 to 2022

Emerging Markets          

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Emerging markets account for about 14% of the world’s stock market cap, or $10 trillion in assets.[1] Companies listed in Brazil, Mexico, Taiwan, Korea, China, and India account for most of the assets in this sector.

Over the past decade, the S&P 500 has trounced the MSCI Emerging Markets Index by 207%. The S&P 500 is up 216%, while the emerging market index has barely budged, up a paltry 9%.

What’s the point of allocating assets to this sector if the returns are so poor? It’s a fair question. The main reason to add international investments to your portfolio is for diversification. During the lost decade from 2000 to 2010, the S&P 500 lost 24%, while emerging markets soared 102% – a difference of 126%. And until last June, the two indices were neck in neck for performance this century.

An allocation of 5% to 10% of your portfolio makes sense for emerging markets.

April 18, 2022

www.parrottwealth.com

Note: Past performance is not an indication of future performance.

[1] DFA 2020 Matrix  Book

Gambling and Investing

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Will Rogers said, “Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” Sound advice.

Over the past decade, the Nasdaq composite index has risen 347%, averaging 16.15% per year. A $100,000 investment is now worth $446,900. The Nasdaq returns have been phenomenal and well above the long-term trend of 10%.

However, the returns have not been without pain. This year the Nasdaq was down 22% before rebounding, and now it’s only down 16.8% from its high. The index fell 30% in 2020, dropped 24% in 2018, and had a few 15% corrections and several pullbacks of at least 10%. The average decline has been 3.5%.

The average annual return for a 3-month US T-Bill has been 0.59% over the same time frame. A $1.00 investment is now worth $1.06. If you don’t want to lose money, invest in T-Bills.

Risk and reward are related. If you can’t withstand the downturns, you’ll never enjoy the up days. To create generational wealth, you need to own stocks.

Happy investing and buy the dip!

April 17, 2022

www.parrottwealth.com

Note: Past performance is no guarantee of future performance.

What A Brutal Year!

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Stocks and bonds are falling while commodity prices are soaring. The Federal Reserve is raising interest rates, investors are not happy, and they are losing patience! However, I’m referring to 1994, not 2022.

In 1994, the S&P 500 fell 1.54% and, at one point, was down 9%, and long-term government bonds plunged by 7.8%. While traditional investments dropped, commodity investments rocketed, generating a return of 16.6%.[1] Sound familiar?

The previous year made 1994 so frustrating because stocks and bonds produced stellar returns. The S&P 500 jumped 10.1% in 1993, and long-term government bonds climbed 13.2%. Investors expected the good times to continue; they didn’t. Last year, the S&P 500 soared 27%, so this year’s negative returns are upsetting.  

What happened in 1994? Alan Greenspan and the Federal Reserve surprised markets by raising interest rates, and Fortune Magazine called it the “Bond Market Massacre.”[2] The Fed Funds rate started the year at 3% and finished at 6% – a 100% increase. The Federal Reserve raised interest rates seven times from February 1994 to February 1995.

In 1994 the Federal Reserve was aggressively hiking interest rates, and a rising rate environment is not good for stocks or bonds. How did the markets fare since 1994? Investors poured money into the commodity sector because of its strong performance. With a strong economy and rising rates, investors chased this hot sector. However, those who bought commodity funds made 1.55% yearly from 1994 to 2022, barely outpacing inflation. A $10,000 investment grew to $15,450.[3] As a comparison, the S&P 500 returned 1,510% or 10.7% per year from 1995. A $10,000 investment grew to $160,540.[4]

Today, investors are frustrated by the lack of performance from stocks and bonds. The stock market is falling, bonds are dropping, and interest rates and inflation are rising. It feels like 1994 again, and investors are ready to jump ship and sell stocks and bonds.

Here are a few thoughts to protect yourself from doing something that may harm your long-term performance.

  • First, do nothing. Don’t chase returns, and don’t make dramatic portfolio changes. The best course of action, at times, is to let your portfolio find its footing. The S&P jumped 37.6% in 1995, 23% in 1996, 33.4% in 1997, 23.6% in 1998, and 21% in 1999. If you sold your stocks in 1994, you missed an incredible run in stocks where they climbed 138%!
  • Diversify your accounts. In 1994, international stocks – large and small, performed well, and real Estate Investment Trusts (REITs) generated positive returns.
  • Buy bonds for your account despite rising rates. Bonds are a vital part of a portfolio, and they provide safety and income. Adding bonds to your account while interest rates rise is an opportunity to lock in higher rates. If you purchased long-term government bonds in 1994, you made 31% in 1995.[5]
  • Rebalance your portfolio to keep your asset allocation and risk level intact. It’s also a great way to buy low and sell high. We screen our model portfolios weekly to look for accounts where the asset allocation has shifted from the original target, and when we find them, we rebalance the portfolio.
  • A financial plan is paramount if you want to be a successful investor. It will help you stay focused on your goals, despite volatile markets.

I don’t know when stocks and bonds will recover, but there will be better days ahead if history is my guide.

But if we hope for what we do not see, we wait for it with patience. ~ Romans 8:25

April 15, 2022

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] Dimensional Fund Advisors 202 Matrix Book.

[2] http://www.businessinsider.com/1994-federal-reserve-tightening-story-2013-1, Matthew Boesler, January 25, 2013

[3] YCHARTS

[4] YCHARTS

[5] DFA 2021 Matrix Boox