Chaos Theory

I don’t like chaos. My anxiety, stress, and blood pressure all rise as it increases. Yet, I work in an industry that thrives on it as thousands of experts analyze millions of data points to try and answer a single question, like, will stocks rise today? Finding one answer is impossible because any input can alter the equation.

According to Google AI, Chaos Theory studies math and physics, examining complex patterns to understand and predict behavior. It states that there are underlying patterns within the randomness of chaotic systems. Wall Street analysts constantly search for patterns in the randomness, but they’re hard to find.

Stocks are chaotic, chock-full of turmoil, continuously rising and falling, whereas US Treasury Bills are peaceful and tranquil. My personality trait and risk profile lean toward safety, and I should own T-Bills, but I own stocks. I allocate more than 75% of my assets to stocks, though it’s outside my comfort zone because I must own stocks to achieve my financial goals.

NVIDIA is the stock to own this year, rising more than 210%, but last year it fell 50%. In 2020, it plunged by 35%; in 2018, it dropped by 56%. It’s a volatile stock, full of turmoil, but over the last decade, it has risen by more than 12,000%, averaging 61% annually – a staggering return.

Apple is the world’s largest company, with a market cap of $2.78 trillion; if you own a mutual fund or participate in a 401(k) plan, you probably own it. The stock is up 37% this year but dropped by 26.8% last year. During the Tech Wreck in 2000, it crashed by more than 80%, falling by 58% in the Great Financial Crisis. Apple is up 900% this decade.

Microsoft software is everywhere, and its stock is a perennial favorite. It’s up 39% this year after falling 28% last year. During the Great Recession, it sank 74%; from 2000 to 2016, it lost 4.9%, but over the past ten years, it’s up 973%.

To generate outside returns and create long-term wealth, you must own stocks despite the chaos, turmoil, volatility, and uncertainty. If you invest too conservatively in safe and predictable investments, you risk not having enough money in retirement.

Embrace the chaos!

Anything worth doing good takes a little chaos. ~ Flea

September 9, 2023

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.

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. Prices and yields are for today only and are subject to change without notice.