Parrott Wealth Management Annual Letter
Tin Cans and Mattresses
Have you been wondering if you should have buried your money in the backyard or stuffed it under the mattress? After all, as you review the year and the performance of our recommendations, it seems evident that stocks and bonds would fall. In 2022, we experienced rising interest rates, inflation, the war in Ukraine, and China’s COVID woes, yet, with those same headwinds and thousands more, the S&P 500 produced an average annual return of 10.12% since 1926, turning $1,000 into $11.5 million. I have the utmost confidence in our models, investments, and financial plans because I have seen them work for over three decades, and I know they will perform well in the future. I’ve learned from more than thirty years in the business that clients who diversify their assets, invest regularly, follow their plans, and remain patient will reap benefits.
The Tortoise and the Hare
Warren Buffett, the CEO of Berkshire Hathaway, is the most successful investor of our generation, with a net worth of $107.6 billion, and his stock currently trades at $468,711 per share and finished last year up 4%. Despite his staggering net worth and stock market performance, he has experienced many down years since 1965. His stock fell 48% in 1974, 23% in 1990, and 32% in 2008. It also fell 30% during COVID and dropped more than 50% in the Great Recession, and from 2007 to 2013, it lost 4.3% per year. If investors panicked and sold the stock over the past thirty years, they would have missed returns of nearly 4,000%. Mr. Buffett believes in patience and said, “Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.” He prefers companies with earnings, revenues, cash flows, and dividends – a slow and steady model that we try to emulate.
In contrast, Cathie Woods ARK Innovation fund trades daily and is highly active. The fund owns growth companies that may pay off in the future, like Roku, Robinhood, and Coinbase. During the peak of COVID, her fund soared 152% and, at one point, outperformed Warren Buffett and Berkshire Hathaway by 200%! However, her fund hit a brick wall last year, losing 67%, as investors shifted their focus to companies with solid balance sheets. As a result, Berkshire Hathaway has outperformed ARK by 80% since the crazy days of COVID. The hare wins again!
The S&P 500, Dow Jones, and NASDAQ suffered terrible losses last year, falling 8.78%, 19.44%, and 33.10%, respectively. What’s interesting about the S&P 500 is that it peaked on January 3, 2022, and fell 12.4% from January to March before the Federal Reserve started raising interest rates. Since the middle of June, it climbed by 2.24%, so most of the damage occurred in the first two and a half months, and five days accounted for 100% of the losses – April 29, May 5, May 18, June 13, and September 13.
As a comparison, the Vanguard Balanced Fund, a low-cost index fund, fell 16.87% last year, and I tracked an unmanaged group of twenty indices, and they fell, on average, 16.5%. There was no place to hide in 2022, but when stocks have dropped by 20% or more since 1957, they returned 29% the following year.
Regardless of the poor performance last year, the indices have performed admirably over the past thirty years. Despite crashes, inflation, rising interest rates, recessions, wars, and pandemics, the Dow Jones soared 1,944%, the NASDAQ jumped 1,845%, and the S&P 500 climbed 1,484%. The average annual return for the big three has been 10.21%. A $100,000 investment in January 1993 is now worth $1.85 million. And, since 1993, stocks have risen 87% of the time. Again, patience rewards successful investors.
Bonds produced their worst year ever as the Federal Reserve raised interest rates to try and combat inflation. The yield on the one-month US T-Bill soared 8,140%, rising from 0.00% to 4.12%, and when interest rates rise, bond prices fall. The iShares 20+ Year Treasury Bond Fund ETF (TLT) crashed by 31.24% last year, losing almost as much as the NASDAQ. For the past fifty years, long-term government bonds have averaged 7.20%.
Bonds could be one of the best-performing asset classes this year if the Federal Reserve lowers interest rates. In 1994, the Federal Reserve raised interest rates by 100%, only to start reducing them in 1995. In 1995, long-term bonds soared by 31.7%.
Despite the carnage in the bond market, it now benefits us because we can offer investments yielding 3%, 4%, 5%, or more, and some of the rates are guaranteed. We have not had the luxury of higher rates for some time. For example, the last time the one-month US T-Bill yielded more than 4% was in 2007.
Stay the Course
Few people like advice that says, “Stay the course.” It’s boring, 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 and could put your financial future at risk.
We recommend a buy-and-hold strategy when managing money which is easy when stocks rise but tough when they fall. It’s a prudent recommendation because stocks rise about three-quarters of the time, and no one can time the market.
When we recommend staying the course, we review multiple components like your financial plan, asset allocation, cash flow needs, and Riskalyze report. We do not make the recommendation lightly. If the data gives us a positive reading, we do not make any changes to your portfolio; if your goals change, we will adjust your plan and investment program accordingly.
Since I started the firm seven years ago, we have completed more than one hundred and forty financial plans, covering $300 million in assets.
The top five retirement goals are travel, purchasing a new car, home improvement, buying a new home, and celebrations (weddings, anniversaries, etc.).
The most popular expectations for retirees are pursuing an active lifestyle, spending time with friends and family, and living less stressfully. However, don’t wait until you retire to enjoy your life.
The two most common retirement concerns are running out of money and suffering investment losses. Running out of money in retirement is not good, and we want to ensure clients can retire on their terms and, more importantly, stay retired. Running out of money and suffering investment losses are competing concerns, and you must choose between risk now or later. If your investments are too conservative early in your career, you may run the risk of running out of money. If your assets are too aggressive later in life, suffering a significant investment loss can have dire consequences. A financial plan will assist you in selecting the proper balance between risk and reward.
Last year, our clients with financial plans were calm and more confident about their financial future and did not panic. If you want to join this impressive group, give us a call to complete your financial plan.
Will there be a recession? According to media outlets, pundits, and influencers, the answer is yes. However, the consensus on Wall Street is mixed, and we won’t know if one occurred until long after it has passed. Countless analysts are trying to read the tea leaves and signals from the stock and bond markets to forecast the recession, and, as Paul Samuelson said, “The stock market has predicted nine of the past five recessions.”
The projected global growth for 2023 is 1.8%, and so long as unemployment remains low, job openings stay high, and wages rise, it will be challenging to enter a recession. Still, if the Federal Reserve continues to raise interest rates, we could face a mild recession. Since 1945 we have experienced thirteen recessions, lasting, on average, ten months. If we enter a recession, the Federal Reserve will lower interest rates, which is positive for stocks and bonds.
The one-month US Treasury Bill is a proxy for cash and is considered the safest investment in the world. It currently yields 4.1%, above its 96-year average annual return of 3%. The S&P 500 closed down 19.4% last year, so a positive 4% 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 7.11%, and the dollar will lose more than half its value over ten years; at the historical inflation rate of 3.25%, the dollar loses 60% of its purchasing power over thirty years. The S&P 500 has risen 1,484% over the past thirty years, averaging 9.65%. Cash always loses the inflation battle, but stocks offer a hedge.
Another negative for cash is that it never grows. Stocks are volatile but allow you to recoup your losses over time; cash won’t. Once you sell stocks to buy T-Bills, you never recover your losses. For example, if you bought the S&P 500 Index in January 2007, you lost more than half your investment (56%) by March 2009. If you panicked and sold, you never recouped your original investment, but if you remained invested through the end of 2022, you could have earned 274%, turning $10,000 into $37,410. In addition to the Great Recession, stocks fell 20% in 2018, lost 30% during COVID, and dropped 20% last year. Even though the market suffered four significant corrections in fifteen years, it almost tripled. The one-month T-Bill returned 0.84% per year before taxes and inflation during the same time frame.
Environmental, social, and corporate governance (ESG) remain hot topics for investors. Through Morningstar, we can offer direct indexing allowing you to avoid investing in particular companies or industries that do not align with your beliefs. Also, if you work for a company like Apple, we can exclude it from your portfolio, so you’re not adding to your concentrated position. The minimum investment for this service is $250,000.
How will the stock market perform in 2023? I don’t have a clue, but I like what JP Morgan said, “It will fluctuate.” Over the past thirty years, the S&P 500 has averaged 9.65% per year, turning $10,000 into $158,400, and was positive 80% of the time. The index experienced consecutive negative years once – from 2000 to 2002. The best one-year stretch occurred from April 2020 to March 2021, when it jumped 56%. The worst one-year period happened from March 2008 to February 2009, when the index dropped 43%.
Inflation has probably peaked, and interest rates should stabilize, benefiting stocks and bonds. A weaker dollar will boost international investments, while lower inflation and interest rates could spell trouble for commodities like gold and silver.
Cash remains attractive for short-term needs. The one-month US T-Bill currently yields 4.25%, significantly higher than rates available from money-center banks like Wells Fargo or Bank of America. The interest rates on US Treasuries could remain at these levels for the foreseeable future.
We continue to shun Bitcoin and other cryptocurrencies and avoid them at all costs. It’s an asset class that continues to fail on several fronts.
Janet continues to support our firm with excellence by working directly with our clients helping them open accounts, transfer funds, or handle the required minimum distribution. In addition, she is leading our efforts to join the Schwab platform. Though the merger won’t close until Labor Day, we joined Schwab early through a pilot program, and she has been instrumental in our smooth transition.
Spencer has been a fantastic addition to our team this past year, and he handles most of our financial planning duties and directs our weekly podcasts. He continues to flourish at PWM, and his future is bright.
He completed his coursework for the Certified Financial Planner® designation and will sit for the exam in July.
Our firm continues to grow; we now work with more than 160 households across fourteen states. As a result, our Starbucks growth indicator remains strong, as we increased our card mailing this year by 11%.
I know it was a challenging year, and my heart aches for your pain, but markets always recover. We appreciate your loyalty, faith, and trust in our firm.
President and CEO
Parrott Wealth Management
January 7, 2023
Rejoice in hope, be patient in tribulation, be constant in prayer.
~ Romans 12:12
Note: The Financial data is from YCHARTS, TD Ameritrade, Dimensional Funds, and Yahoo! Finance. Past performance does not guarantee future performance,
and your results may vary.