Month: October 2022

Stay The Course

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Stay the course is boring financial advice, and people hate it, especially when stocks fall. Doing nothing is challenging; it’s hard, and it feels like a cop-out. When stocks fall, clients want action; they want to rearrange the deck chairs and take control of the situation, but it could do more harm than good.

Most financial planners recommend a buy-and-hold strategy when managing money which is simple when stocks rise but challenging when they fall. It’s a popular recommendation because stocks rise about three-quarters of the time, and no one can time the market.

Pilots set their coordinates for their final destination and rarely diverge from their route unless necessary. They will change course to avoid storms or turbulence, but, for the most part, they keep the nose of their plane headed toward their target. This past summer, my wife and I drove thousands of miles visiting several national parks. Each day we’d set our GPS for the next park, and we did not deviate from the directions and arrived safely each time.  

I’ve gotten in trouble whenever I ignore a trail map while hiking, biking, or skiing. When my daughter was about ten, we went skiing at Crested Butte, and I decided to take her on an unmarked shortcut back to the ski lift. It did not go well. We got stuck in waist-deep powder and could not move. We had to forge our path; it took a long time before we could return to the trail. It was a scary ordeal.

A financial plan will help guide you to your destination by quantifying your goals, assessing your risk tolerance, and measuring your time horizon. It will lead you through a perilous market and treacherous economy. When markets are falling, and clients are worried about losing money, a financial plan can bring peace. The likely recommendation from the advisor is to remain calm and stay the course because of the plan.

Investors have liquidated nearly $100 billion from growth-equity mutual funds over the past year, likely transferring the money to a money market fund or savings account.[1] This strategy might be safe in the near term, but it could prove disastrous over time. The report ended on September 30, 2022, and since then, the Dow Jones has risen nearly 13%, its best monthly performance in more than 35 years! To get above-average returns, you need to stay in the market. As I’ve told clients, “If you’re not on the plane when it takes off, you’re not getting on.” Selling from a position of fear is not wise. If your plans change, then alter your investment strategy. However, if you don’t need your money and your goals remain intact, stay the course!

I recently met with an individual who is interviewing several financial advisors. He is looking for one who can trade the hottest and most popular sectors, in this case, energy and commodities. I informed him that we select a buy-and-hold portfolio based on his financial goals and do not trade sectors or chase securities. I then showed him a 10-year chart of how the Dow Jones Industrial Average destroyed commodities. He was not impressed and is convinced that there is an advisor out there somewhere who can time the market. I wished him well.

It’s a difficult market; returns stink, but stocks recover. Be patient, follow your plan, and stay the course.

What kind of man would live where there is no daring? I don’t believe in taking foolish chances, but nothing can be accomplished without taking any chance at all.” — Charles A. Lindbergh

October 28, 2022

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 Fund Flow Report – 9/30/2022

Return Expectations

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Growing up, I was a picky eater and tried to limit my intake to peanut butter sandwiches, chips, and M&M’s. It worked for several years, but I needed to expand my palate as I grew older. My expectations for fruits and vegetables were low, but I began to appreciate more refined foods as I grew older.

Investment returns are abysmal this year as inflation rises to a 42 – year high. As inflation soars, so do interest rates forcing stocks and bonds to retreat. The S&P 500 is down 22.5%, its worst performance since the Great Recession in 2008, and investors expect further weakening.

Focusing on year-to-date returns is depressing, especially since stocks have fallen significantly. If we step back from the daily moves, we get a better picture of the long-term returns from stocks. Here is an extended view of S&P 500 returns.[1]

  • Three-Year Return: 24%
  • Five-Year Return: 44%
  • Ten-Year Return: 157%
  • Fifty-Year Return: 3,280%
  • Seventy-Year Return: 15,210%

Since 1926, the S&P 500 has generated an average annual return of 10.2%, long-term government bonds returned 5.3%, cash has gained 3.2%, and inflation averaged 3%. Let’s explore expected returns using historical data.

  • 100% stock allocation: If you allocate all your money to stocks, your expected return is 10.2%, and after subtracting inflation, your net return is 7.12% (10.2% – 3% = 7.2%).
  • 100% bond allocation: If you allocate all your money to bonds, your expected return is 5.3%, and after subtracting inflation, your net return is 2.3% (5.3% – 3% = 2.3%).
  • 100% cash allocation: If you allocate all your money to cash, your expected return is 3.2%, and after subtracting inflation, your net return is 0.2% (3.2% – 3% = 0.2%).

Allocating all your funds to one asset class does not make sense, so let’s explore a few asset allocation models using the same historical data.

  • 70% stocks and 30% bonds: The expected return is 8.73%, and the net return is 5.73% after inflation.
  • 60% stocks and 40% bonds: The expected return is 8.24%, and the net return is 5.24% after inflation.
  • 50% stocks and 50% bonds: The expected return is 7.75%, and the net return is 4.75% after inflation.
  • 40% stocks and 60% bonds: The expected return is 7.26%, and the net return is 4.26% after inflation.
  • 30% stocks and 70% bonds: The expected return is 6.77%, and the net return is 3.77% after inflation.

A diversified portfolio owns large, small, and international stocks, short, intermediate, and long-term bonds, and it may hold an alternative asset class like real estate. In a diversified portfolio, one investment is always down; if there isn’t, the portfolio is not diversified. We must apologize for at least one asset class that loses money each year. A typical Wall Street saying is, “Diversification means always having to say you’re sorry.”

Warren Buffett’s holding period is forever, and that’s why he is worth $100 billion. He does not get rattled when stocks fall and has said, “Be greedy when others are fearful.” When we build portfolios, we choose the most prolonged time horizon possible for our review to account for various economic and market cycles. Sometimes, the data goes back more than a hundred years, and we’re not concerned with daily, weekly, monthly, or yearly returns because we think generationally.

A financial plan is a vital component for successful investors, and it will quantify your goals and determine your asset allocation. During difficult economic times, we encourage our clients to follow their financial plans and not lose sight of their goals. If your financial plan is working, there is no need to abandon it or your investment portfolio.

Here are a few suggestions to help you with your investments.

  • Think generationally.
  • Expand your time horizon when reviewing your portfolio.
  • Follow your plan.
  • Rebalance your accounts.
  • Don’t panic.
  • Buy the dip.

As markets oscillate, focus on your financial goals because your future self will thank you.

What the hell is a gigawatt? ~ Marty McFly, Back To The Future

October 20, 2022

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] DFA Matrix Book and Returns Web

My Client Patty

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I’ve worked with Patty (not her real name) for the past thirty years. She became a client when I worked for a large Wall Street firm, and in the early 1990s, we developed a rudimentary financial plan that’s still working today. Patty is now in her mid-nineties and does not worry about market corrections, drops, dips, pullbacks, or crashes, and she usually says, “We’ve seen this before, and we know the market will recover.”

Soon after completing her financial plan, she called to ask if she could afford a new car, and I told her she could buy two. Her financial plan allowed us to invest and spend courageously, regardless of economic conditions, and it still does.

Her plan has been in distribution mode from the beginning, and we have sent her more money than her account is currently worth because of the long-term trend of the stock market and the power of compounding interest. Her wisdom and foresight have kept her invested despite the generational headwinds.

A few years ago, she blessed her great-grandchildren by opening education accounts. She had more than enough money for the rest of her life, so she cracked open her nest egg to fund the accounts. Her great-grandchildren may attend college for free because of her generous gift.

Patty is strong in her faith and receives great joy from serving others with her time, talent, and treasure. She is an optimist with a positive outlook on life and does not let a bear market sour her mood.

After each portfolio review, I half-joking ask Patty if she could speak to all my clients because of her positive outlook. She won the race long ago, focuses on things she can control, and ignores the rest.

If Patty had panicked during the past three decades, she would not have the wealth she does today, nor could she have funded her great-grandchildren’s education accounts. She has been able to overcome her fear and focus on the future.

I have a hundred years of data for stocks, bonds, interest rates, inflation, etc., to try and convince clients that markets rebound, but Patty is living proof that if you follow your plan, think long-term, and have faith, things will turn out well.

If you want to succeed as an investor, follow Patty’s lead.

Someone’s sitting in the shade today because someone planted a tree a long time ago. ~ Warren Buffett

October 17, 2022

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.

Seven Deadly Sins

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Here are seven deadly sins to avoid as markets pirouette uncontrollably.

  1. Panic. If you panic and sell your stocks, you could permanently damage your long-term financial goals.
  2. Financial Plan. A financial plan provides benchmarks, goals, and targets to keep you focused on your future. If you don’t have one, you invest blindly and rely on luck.
  3. Cash Balance. A large cash balance provides comfort as stocks fall, but it’s a long-term drag on performance and loses its value to inflation over time.
  4. Rebalancing. Rebalancing reduces risk. If you don’t rebalance your account during market corrections, it may be too conservative when the recovery comes.
  5. Recovery. The stock market has always recovered. It may take days, weeks, months, or years to recover, but it always has rebounded. If you liquidate your portfolio, you may miss a powerful bounce.
  6. Spending and Savings. If you spend too much and save too little, you could impair your financial future. Spending and saving are the only things you can control; everything else is beyond your reach.
  7. Lack of Faith. I know God is in control, I believe in America, and I trust free markets. Faith is paramount.

For our light and momentary troubles are achieving for us an eternal glory that far outweighs them all. So we fix our eyes not on what is seen, but on what is unseen, since what is seen is temporary, but what is unseen is eternal. ~ 2 Corinthians 4:17-18

October 13, 2022

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.

100 Years of Data           

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When will the market recover? When will inflation fall? Will interest continue to rise? These are the three questions clients ask about the current state of the economy. These are reasonable questions, but I don’t have any idea. I do have, however, 100 years of data to support my thesis that stocks will eventually recover and inflation will subside.

Stocks

Since 1926, the S&P 500 has averaged 10.07% per year despite wars, recessions, corrections, and politicians. The market has risen approximately three-quarters of the time, or three out of every four years, which means one-quarter of the time it falls. The S&P 500 has a winning percentage of 750%. The New York Yankees are considered the best major league baseball team in history, winning 27 World Series titles, and their winning percentage is only 570%. If the market finishes in negative territory this year, it will be the thirteenth time in the last fifty years, in line with historical averages. Since 2015, the S&P 500 has lost money in four calendar years, including this year. In other words, it made money 73% of the time. I don’t know when the market will recover, but I like my odds.

Inflation

Inflation has averaged 3.26% dating back to 1914. In the past, an increase in inflation resulted from an event like WWI, WWII, or the Arab Oil Embargo. I believe the recent spike is due to COVID, supply chain issues, and our government’s response to the shutdown. After each spike in inflation, it started to decline almost as fast as it climbed. We are already seeing signs of inflation easing at the gas pump, shipping containers, and used-car prices.

Interest Rates

Interest rates continue to rise in response to rising inflation. The one-year US T-Bill yields 4.19%; last year, the yield was .09%, an increase of 4,555%. Since 1871, the average long-term interest rate has been 4.49%. And from 1871 to 1967, the rate mostly stayed below the average. It wasn’t until 1967 that rates climbed significantly, rising from 4.59% to a peak of 15.32% in 1981. After the peak, interest rates fell 93% from 1981 to 2020. In 1994, the Federal Reserve increased interest rates by 100% from 3% to 6% before lowering them in 1995, which started an epic run for stocks where they soared 226% from January 1995 to April 2000.

I believe in reversion to the mean, and I expect stocks to rise and inflation and interest rates to fall, but I don’t know when it will happen, but I have one hundred years of data on my side.

History never repeats itself, but it does often rhyme. ~ Mark Twain

October 7, 2022

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. Though the Yankees are the winningest team in MLB history, I expect the Dodgers to win this year’s world series.

Is Cash A Refuge?

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Cash is a beneficiary when stocks fall, as investors look for peace in large cash balances, especially in a bear market.

The one-month US Treasury Bill is a proxy for cash and is considered the safest investment in the world. It currently yields 2.8%, close to its 96-year average annual return of 3%. The S&P 500 is down 20% this year, so a positive 3% return looks appealing.

Cash is a short-term haven if you need liquidity or safety, but it’s a poor investment. The current inflation rate is 8.25%, and the dollar will lose more than half its value over ten years; at the historical inflation rate, the dollar loses 60% of its purchasing power over thirty years. The S&P 500 has risen 807% over the past thirty years, averaging 7.6%. Cash always loses the inflation battle, but stocks can offer a hedge.

Another negative to a large cash balance is that it will never grow. Stocks are volatile but allow you to recoup your losses over time; cash won’t. Once you sell stocks and park the money in a money market fund, you never recover your losses. For example, if you bought the S&P 500 Index in January 2007, you lost half your investment by March 2009. If you panicked and sold, you never recouped your original investment, but if you remained invested, you could have earned 166%, more than doubling your money. In addition to the Great Recession, stocks fell 20% in 2018, lost 30% during COVID, and dropped 20% this year. Despite the market suffering four significant corrections in fifteen years, it more than doubled. The one-month T-Bill returned 0.80% per year before taxes and inflation during that same time frame.

I recently sold my daughter’s stock investments because she will buy a home next year. It was painful for me to sell because she had owned great companies like Apple, Amazon, Microsoft, Pepsi, and Tractor Supply. Amazon was her best-performing investment after purchasing it for $2.25 in 2005. She made 5,320% – not too shabby. However, it’s time to transfer one asset for another. In the meantime, I bought US T-Bills to protect her principal.

Cash is a valuable tool for emergency funds, short-term needs, and liquidity, but if your time horizon is longer than one year, consider buying and holding stocks. Selling stocks when they fall may impact your financial future. Instead of trading stocks on emotions, follow your financial plan and diversify your assets across stocks, bonds, and cash to remain invested.

In skating over thin ice, our safety is in our speed. ~ Ralph Waldo Emerson

October 6, 2022

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.

Finish Your Race

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In 2015, I ran the San Diego Rock ‘n’ Roll Marathon. I turned 50, and my goal was to finish the marathon in 3 hours and 15 minutes. I was on pace for the first 23 miles, but the next few miles required a significant hill climb to the finish line. It was soul-crushing, and I did not hit my target, but I ran a personal best time of 3 hours and 21 minutes – not bad for an old guy! If I did not set the ultimate goal of finishing the marathon, I would’ve quit before the hill climb. However, I kept my feet moving and crossed the finish line in record time.

In 2007, I recommended balanced, diversified investment portfolios to clients. The models consisted of large, small, and international stocks and included cash, bonds, and real estate holdings. The models were globally diversified, similar to our investment models today. The models performed well until the Great Recession when the S&P 500 dropped more than 50%, a sixty percent stock and forty percent bond portfolio fell by 41%. A few clients panicked and sold in 2008 and 2009. They took their eyes off their goal and did not finish the race. If they remained invested, they could have doubled their money.

The sixty model doubled in price from January 1, 2007, to September 30, 2022, despite the crash in 2008, a double-digit loss during the fourth quarter of 2018, the COVID correction, and the recent sell-off. Investors who sold and bought a short-term bond fund like the iShares 1- 3 Year Treasury Bond Fund (SHY) earned 1.73% during that same period. The “safe” option turned out to be a poor choice.

Successful investing requires goals, patience, endurance, courage, and wisdom. If you don’t have a plan, you will likely abandon your investments when times get challenging. A plan can keep you focused and grounded on your financial goals, allowing you to benefit from the long-term growth of stocks.

Obstacles are those frightful things you see when you take your eyes off your goal. ~ Henry Ford

October 3, 2022

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. My previous PR occurred at the Boston Marathon in 2011, where I finished the race in 3:22.