Goodbye 2022

Goodbye, 2022, and good riddance. Don’t let the door hit you on the way out. What a brutal year for investors, as most asset classes lost money. In hindsight, I should have buried my money in the backyard or stuffed it under my mattress.

The S&P 500 is having its worst year since 2008. and long-term government bonds have dropped 25.5%, the worst year since 1926 and probably ever. Ever! The stock market posted stellar returns in 2021, rising 26.8%, and soared 72% since 2019. The momentum was on our side until the Federal Reserve raised interest rates by 1,700%. And who wanted to buy a T-Bill yielding 0.06%, which it did in January?

The Federal Reserve is trying to kill inflation by raising interest rates from .25% to 4.25%. The inflation rate is 7.11% after peaking at 8.58% in June. It is falling but still high, and the Federal Reserve will continue to battle the silent economic killer.

Consumer sentiment remains low, and investors are depressed. The US Index of Consumer Sentiment peaked on January 1 and has dropped consistently since the beginning of the year. The current index reading is 59.10, near the lows dating back to 1952, and it has averaged 85.8 for the past 70 years. It peaked at 112 in February 2000 before the S&P 500 fell 43%. You must be excited with the current number if you’re a contrarian or perpetual optimist.

Investors are bearish according to the recent US Investor Sentiment Percentage Bullish reading of 24.3%. 75.7% of investors are negative and expect stocks to fall further, and 24.3% are hopeful they will rise. Last April, the index peaked near 60% as most investors were optimistic about the future direction of stocks. Investors now expect markets to fall more, with little hope for the future. However, a low reading is bullish for stocks.

Cash is attractive relative to falling stocks and bonds, and it’s now possible to buy a one-month US T-Bill yielding 3.8%. Investors love T-Bills because they’re guaranteed and don’t lose money if held to maturity, and they provide relief to weary investors in the near term, but they’re no match for stocks in the long run. Since 1926, T-Bills averaged 3.24%, and stocks produced an annual gain of 10.2%. A dollar invested in T-Bills is now worth $21.97; for stocks, it’s $12,231. Inflation averaged 2.95%, so your net return on T-Bills was 0.29% before taxes. Cash is a short-term gain but causes long-term pain.[1]

I’m excited for 2023 because I believe in free markets and love owning great American companies. I’m also an optimist fond of diversification, asset allocation, and financial planning. And hope springs eternal.

Merry Christmas and Happy New Year! May God’s light shine brightly on you and your loved ones.

What a wonderful thought it is that some of the best days of our lives haven’t even happened yet. ~ Anne Frank

December 15, 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.


[1] Dimensional Fund Advisors Returns Web Tool from January 1926 to November 2022.

Seasons              

Winter is cold, wet, and dreary. Overcast skies, low temperatures, and icy roads are the norm in parts of the world, and some people don’t like this season. I get it. I lived in Connecticut for a few years after growing up in sunny Southern California. My first winter was depressing; I sometimes felt like Jack Nicholson in The Shining. However, I learned to love the winter because I could ski, hike in the snow, and build massive fires, and it was only one season, and eventually, spring would arrive.

Surviving one season is not hard, especially if you learn to take advantage of it, knowing that the three best seasons – spring, summer, and fall, will arrive shortly. If you don’t like winter, use your off-season to prepare for better days by exercising, reading, or learning a new hobby.

Like the four seasons, stocks can fall into quarters. About three-quarters of the time, stocks rise and finish in positive territory, but they lose value a quarter of the time. It’s a good ratio and favors equity investors with a generational mindset. When stocks fall, identify potential winners or prune losers from your portfolio. In addition, fortify your balance sheet by saving more money or cutting expenses. A down market is an opportunity to prepare yourself for better days ahead.

Since the end of WWII, or 1945, the S&P 500 has risen 79% of the time – up 60 times and down 16, producing an average annual gain of 11.65%. A dollar invested in 1945 is now worth $4,845. The best three-year stretch for the index occurred from August 1984 to July 1987, where it returned 33.41% per year. The worst three-year period happened from April 2000 to March 2003, when it declined 16% annually. The S&P 500 has never lost money over a rolling 15-year period dating back to 1945.[1]

The average calendar loss for the S&P 500 from 1945 has been 11.75%, but the gain following the losing year has averaged 25.76%. Buying stocks in down markets has historically been a winning strategy.[2]

In contrast, long-term government bonds lost money 24 times, with an average loss of 4.14%. A dollar invested in bonds is now worth $77.99, or 62 times less than equities. The average gain since 1945 has been 5.82% or exactly half of the S&P 500 return.[3]

Snow and ice eventually melt. Seasons come and go, and markets always recover. Do not fear down markets. Instead, use them as an opportunity to get ready for the next season in your life.

People ask me what I do in winter when there’s no baseball. I’ll tell you what I do. I stare out the window and wait for spring. ~ Rogers Hornsby

December 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.


[1] Dimensional Funds – Returns Web – 1/1/1945 to 12/31/2021

[2] Ibid

[3] Ibid

I Quit!

As the end of the year approaches, you may have thoughts about quitting your job and starting fresh next year. January is ideal for changing careers, returning to school, or starting a business, and it appears several people on my LinkedIn feed have already made a change. Moving to a new company or starting a business is exciting, but make sure you have a plan before you leap.

Is the grass greener on the other side of the fence? My dad often asked if I was running from something or towards something, and it made a big difference. Are you quitting your current job to pursue a better opportunity or to improve your position? If you’re unsure, write down the reasons you want to move. What are the pros and cons of leaving your current employer? As Pete Townsend and the Who sang, “Meet the new boss, same as the old boss.” Be careful, and don’t get fooled again.

Below are a few suggestions for all the job hoppers.

  1. If you plan to take some time off before starting a new job, ensure that your cash balance can cover 12 to 18 months of expenses. A significant cash balance can make your transition more manageable because you can avoid debt or liquidating your investment holdings.
  2. Keep a Journal about why you want to move to a new employer or start a business. Writing your goals can help you clarify your thinking.
  3. Create a budget. Do you have the resources to change jobs or start a business? Will your budget support your new lifestyle, or can you reduce or eliminate some items?
  4. Review your health insurance coverage before making a transition. You might be able to continue your insurance coverage for a few months through COBRA. Here is a link to the Department of Labor’s COBRA site: https://www.dol.gov/general/topic/health-plans/cobra. You can purchase coverage through the exchange if you don’t have healthcare access. Here is a link: https://www.healthcare.gov/. Regardless, your healthcare insurance premiums will be expensive.
  5. You have several options if you participate in your employer’s retirement plan. You can leave the assets in your plan, roll over your assets to an IRA, or receive a cash distribution. If you’re under 59 and a half, I recommend against the cash distribution because you’ll pay a 10% penalty on top of income taxes. You can also transfer your old retirement account to your new employer’s plan.
  6. Can you exercise your restricted stock units or stock options before you leave? Will your new employer reimburse you for equity compensation you lost because of vesting?
  7. Hire an attorney if you have a non-compete clause. An employment lawyer can help you avoid trouble with your previous employer before it starts. It’s worth spending a few dollars on attorney fees to keep you out of harm’s way.
  8. If you’re starting your own company, hire a business attorney to help you launch successfully. In addition, separating your finances by opening a business checking account, credit card, and business email address will look more professional.

A new year is full of hope and optimism, especially following this year’s challenges. A new job or career change may rejuvenate you and give you the energy to soar to new heights.

The only way to do great work is to love what you do. If you haven’t found it yet. Keep looking. Don’t settle. ~ Steve Jobs

December 12, 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.

Rising From The Ashes

The Phoenix, a Greek mythical character, is considered an immortal bird that rises from the ashes of its predecessor.[1]  Of course, it is a myth, but the image of one rising from the ashes to get a new lease on life is powerful. We all want a second shot or do-over, especially with investing.

It has been a challenging year as most asset classes have traded in negative territory, there have been few places to hide, and diversification has not worked. Stocks and bonds reacted negatively to rising interest rates as the Federal Reserve tried to control inflation, and the rate increase was too much to bear for investors.

Are you ready to rise from your investment ashes? Here are a few suggestions to help you soar to new heights.

  • Complete a financial plan. Your plan will help guide your future and quantify your goals, giving you a path to follow. More importantly, it validates your success and can bring you financial peace. Our clients with financial plans appeared more relaxed and better prepared to handle the market’s turbulence this year than those without one.
  • Rebalance your account. If you did not make any changes to your investment portfolio this year, it is probably out of whack from your original allocation. As a result, you may enter 2023 positioned incorrectly, either too conservative or aggressive. Rebalancing your portfolio realigns it to the proper risk level and tolerance. January is a good time to rebalance because all your 2022 dividends and capital gains will have been credited to your account.
  • Review your holdings. Do you have the correct investments for the new year? Will your current portfolio allow you to reach your goals? Use the final few weeks of the year to examine your holdings.
  • Adjust your goals. Is it time to review your goals like spending, retirement date, college funding, or major purchase? Use the coming year to set new goals or update old ones.
  • Buy stocks. The S&P 500 is down 16% for the year, and the last time it had two negative years in a row occurred more than twenty years ago, and since 1941, it only happened twice, and the average gain following a negative year was 25.3%.[2]
  • Buy bonds. Bonds are producing income again after a long hiatus. It’s now possible to buy bonds yielding 3%, 4%, 5%, or more. The one-month US Treasury Bill yield soared 7,720% this year, rising from 0.05% to 3.91%. Will it rise another 7,700% next year? Doubtful. If it did, the yield would increase to more than 300%!

I know it was a tough year, but markets always rebound. The carnage in stocks and bonds can create opportunities for next year, so use the market’s decline to strengthen your portfolio.

In order to rise from its own ashes, a phoenix first must burn. ~ Octavia Butler

December 5, 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] https://www.greekmythology.com/Myths/Creatures/Phoenix/phoenix.html

[2] Dimensional 2022 Matrix Book – 1941 to 2021

4 Covered Call Ideas

Writing options on stocks you own, or want to own, is an excellent way to generate income and reduce risk. Below are four stock and options ideas.

American Express

Symbol: AXP

Price: $157.26

Strike Price: $160

Expiration: 12/16/2022

Option Premium: $2.39

Option Income (1,000 shares): $2,390

Stock Return: 1.74%

Option Return: 1.52%

Total Return: 3.26%

Annualized Return: 108.24%

Costco

Symbol: COST

Price: $487.25

Strike Price: $510

Expiration: 2/17/2023

Option Premium: $16.70

Option Income (1,000 shares): $16,700

Stock Return: 4.67%

Option Return: 3.43%

Total Return: 8.10%

Annualized Return: 39.94%

Genuine Parts

Symbol: GPC

Price: $185.23

Strike Price: $190

Expiration: 03/17/2023

Option Premium: $7.30

Option Income (1,000 shares): $7,300

Stock Return: 2.58%

Option Return: 3.94%

Total Return: 6.52%

Annualized Return: 23.32%

Meta

Symbol: META

Price: $122.53

Strike Price: $135

Expiration: 03/17/2023

Option Premium: $9.10

Option Income (1,000 shares): $9,100

Stock Return: 10.18%

Option Return: 7.43%

Total Return: 17.60%

Annualized Return: 62.99%

Options trading involves risk and is not suitable for every investor. Your returns could differ significantly from those posted in this blog, and you could lose money. Do not use margin or leverage to trade options. Please refer to the Characteristics and Risks of Standardized Options to learn more about options trading and writing – https://www.theocc.com/. We have no affiliation with the OCC or the Options Industry Council.

Price and return data is from December 5, 2022, and is subject to change without notice. Data sources: Value Line, YCharts, and TD Ameritrade.

Bill Parrott is the President and CEO of Parrott Wealth Management – www.parrottwealth.com

Social Security Facts and Data

The Social Security Administration is chockfull of data, and its website is a valuable planning tool. Below is some useful information.

  • Sixty-six million Americans are receiving a Social Security benefit totaling one trillion dollars. As a comparison, the US GDP is $25.7 Trillion.
  • Sources for Social Security revenues (2020): 89.6% = payroll tax; 6.8% = interest; 3.6% = Taxation of benefits.
  • There are 2.8 covered workers for each Social Security beneficiary, which could drop to 2.3 in 2035.
  • The median benefit for all beneficiaries is $1,590.
  • The median benefit for men is $1,814.
  • The median benefit for women is $1,403.
  • About 90% of people age 65 and older are receiving Social Security benefits.
  • 37% of men and 42% of women receive 50% or more of their income from Social Security benefits.
  • About 1 in 4 individuals may become disabled before age 67.
  • The number of Americans age 65 or older may increase to 76 million from 58 million by 2035.
  • 32% of workers do not have access to a pension plan.
  • 63% of workers save for retirement through their company plan.
  • The 2023 cost of living adjustment for the Social Security benefit is 8.7%.
  • By 2050, 80% of divorced spousal beneficiaries may be women.
  • The full retirement age for individuals born before 1954 is 66.
  • The full retirement age for individuals born after 1960 is 67.
  • If you’re divorced, your ex-spouse qualifies for benefits based on your earnings, but it will not impact your Social Security payout. To qualify for benefits, they must be 62 or older and unmarried.
  • The eligibility range for benefits is age 62 to 70, and your benefit increases by approximately 8% annually until age 70. For example, if your monthly payout at age 62 is $1,700, it could rise to $3,146 at age 70.
  • Your lifetime earnings determine your benefits, and the administration uses 35 years of wages in which you earned the most money.
  • The life expectancy for a male aged 67 is 17.6 years.
  • The life expectancy for a female aged 67 is 20.1 years.
  • On your personal Social Security site, you can check your benefits, estimates for your spouse, and employment history.
  • Create your Social Security page here: https://www.ssa.gov/myaccount/
  • The Social Security website has several calculators to help you optimize your benefits. https://www.ssa.gov/benefits/calculators/

I encourage you to establish your online account with the administration to track your benefits and income history to ensure you’re maximizing your benefits.

The data from the Social Security Administration is helpful but frightening. For example, the median benefit for all recipients is $1,590. A significant percentage of individuals rely on their payout for half their income, meaning many live on approximately $38,000 annually before taxes. Also, women may account for 80% of divorced spousal benefits by 2050, and 63% of workers are saving for retirement through their company plan, suggesting 37% are not.

Moral of the story: You must save money when you start working, and the more you save, the better. If you don’t invest regularly, you’re putting your faith in Social Security to cover all your retirement expenses, and the data says it is not a good idea.

The trouble with retirement is that you never get a day off. ~ Abe Lemons

December 1, 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.

Data source: www.ssa.gov