Weekly Stock Market Update

Happy Saturday,

Finally, some good news for investors as the Dow Jones rose 12.84% for the week. On Tuesday, the index rose 11.37%, the best day in 91 years, and the fourth-best percentage move of all-time. The Dow Jones posted its first consecutive up days since February 5 and 6.

Our models continue to rebalance weekly, looking to sell expensive assets and buy inexpensive ones. This week we sold bonds and purchased real estate investment funds —the model’s trade without emotion, which is good because I would not have made this trade. The real estate sector soared 17.38% this week.

We are selling individual corporate bonds, especially companies whose balance sheets are suspect. In 2008, companies with weak financials saw the price of their bonds drop significantly, some trading to zero. Boeing and Gap are two bonds we sold this past week.

We’re taking advantage of the drop in stocks to harvest losses in taxable accounts. Tax-loss selling will allow you to realize losses today to offset gains tomorrow.

Citigroup tracks market sentiment through their Panic/Euphoria Model, and it’s reasonably accurate. It is now in panic mode, a positive sign for stocks because stocks like to climb a wall of worry, and the best time to buy stocks is when fear is high. If you wait for the “all-clear” signal, it’s too late.

Here’s how stocks, bonds, and other asset classes performed this past week.

  • The S&P 500 rose 10.50%
  • The NASDAQ rose 8.55%
  • International rose 12.35%
  • Emerging Markets rose 5.75%
  • Long-Term Bonds rose 5.19%
  • Gold rose 8.66%
  • Oil fell 9.05%
  • Chinese Stocks rose 6.20%

Our Government leaders passed the Cares Act this week, and it’s powerful. Here are the highlights.

  • The IRS will issue $1,200 checks to individuals. Families with children under age 17 will receive $500 per child. The income threshold is $150,000 for married couples, $75,000 for individuals. Your payout will be reduced by $50 for every $1,000 you’re over the income limit. (Kitces & Levine)
  • You can withdraw up to $100,000 from your IRA for Coronavirus-Related issues. The 10% penalty will be waived, and you can repay your IRA over three years. Your income can also be spread out over three years. (Kitces & Levine)
  • The loan limit amount in 401(k) plans is now $100,000 up from $50,000. (Kitces & Levine)
  • All 2019 and 2020 Required Minimum Distributions (RMD’s) from IRA’s are waived. You do not need to take a distribution from your IRA in 2020. (Kitces & Levine)
  • Student loan payments are deferred until September 30, 2020 (Kitces & Levine)
  • Individual small businesses may qualify for loans up to $10 million, or 2.5 times average payroll costs, to cover payroll, rent, mortgage interest, insurance, etc. (Kitces & Levine)
  • The 2020 AGI limit is waived for charitable contributions. You may be able to eliminate all your 2020 tax liability through charitable donations. If you’ve never used your resources to help others, this is a great year to start. (Kitces & Levine)

Here is what Warren Buffett said about the 2008 stock market correction in the Berkshire Hathaway Annual Report: “Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21 1⁄2% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years.

America has had no shortage of challenges. Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.”

The shelter-in-place is challenging, but also encouraging. In my neighborhood, people are enjoying the outdoors by walking dogs, riding bikes, and hiking trails. A group of kids is painting rocks and leaving them on the sidewalks. Families have been coloring their driveways with heart-warming messages, and kids have put teddy bears in windows for a neighborhood-wide “bear hunt.” Since we might be homebound for some time, I started reading War and Peace! What books are you reading?

“Wealth isn’t primarily determined by investment performance, but by investor behavior.” ~ Nick Murray, Simple Wealth Inevitable Wealth

Have a great weekend, and keep the faith!

If you want more information, please call me at 512-922-4429.

Sincerely,

Bill Parrott, CFP®

President and CEO

Parrott Wealth Management

www.parrottwealth.com

 

7 Things to Do During a Quarantine

The Coronavirus is spreading. Countries and cities are in lockdown. Our government and businesses are encouraging their employees to work from home, and senior citizens are advised not to leave their houses. It’s a dark and dire time for the global community, so how can you make the best of a bad situation? Here are seven ideas.

  • Go for a hike with your family and enjoy the great outdoors. You can explore new trails in your city while keeping a safe distance from others. My family and I hike our neighborhood trail with our dog Cricket. We put a bear bell on her to let the snakes and other creatures know we’re coming. The bell also helps us locate her because she’s a lab with a mind of her own. After being cooped up in our house, it’s nice to go outside and enjoy Mother Nature.
  • Read a book. It’s an excellent time to turn off your TV because there is nothing but bad news on the airwaves and there are no sports to watch. Here are a few of my favorite books: The Fountain Head, The Hunt for Red October, Jurassic Park, The Old Man and The Sea, Catch-22, American Rust, Atlas Shrugged, The Firm, Treasure Island, Oil!, The Invisible Man, The Adventures of Huckleberry Fin, The Adventures of Tom Sawyer, The Count of Monte Cristo, The Once and Future King, Lone Survivor, Amateur’s, The Worst Hard Time, The Right Stuff, Moneyball, Into Thin Air, The Perfect Storm, The Grapes of Wrath, East of Eden, For Whom the Bell Tolls, To Have and Have Not, and The Hobbit.
  • Play a game. As a family, we’ve played board games for years. When my daughter was younger, most of the games involved horses like Herd Your Horses or Horse Show. We now play Catan, Ticket to Ride, Hive, Monopoly, Uno, or Mexican Train.
  • Learn a new hobby. You can access hundreds of thousands of free platforms online to learn a new language or skill from the comfort of your home. Numerous universities are offering free online courses because of the crisis. I’m learning to play the guitar. I’m horrible, but I’m having fun.
  • Fix up your home. Have you been waiting to paint a room, clean your garage, or wash your windows? With time on your hand, you can now tackle your growing to-do list. My daughter and I are going to build two vegetable boxes and a border for our rose garden.
  • Write a letter to a friend or family member. A handwritten note is a novelty, so spread some cheer with your penmanship.
  • Read the Bible. The Bible has about 365 verses on fear or worry, one for each day. Proverbs is a great place to find wisdom, and it has 31 chapters in Proverbs, one for each day. Psalms, Romans, Hebrews, Galatians, Song of Songs, Ephesians, Matthew, Mark, Luke, John, and the other 56 books are worth a read.

When I was growing up, I played baseball. During one game, while playing left field, a left-handed batter hit a line drive toward me, and because a left-handed batter hit it, it had a wicked slice. It was spinning away from me, and it was too late for me to adjust my path. It got past me and rolled to the fence. We lost the game; I burst into tears, and I thought my life was over. However, it wasn’t the end of the world. My dad, who is left-handed, spent hours hitting me fly balls, and I turned my weakness into a strength.

The world is not going to end tomorrow, and we will live to see another day. Don’t let the weight of the world keep you down. We will defeat the virus. Be strong and keep the faith!

The wolf will live with the lamb, the leopard will lie down with the goat, the calf and the lion and the yearling together; and a little child will lead them. ~ Isaiah 11:6

March 19, 2020

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.

 

 

 

 

 

 

 

 

 

 

A Day in the Life of a Market Correction

Global stocks continue to fall, and each morning I wake up to check to see what the markets have in store for the day. I look at my phone (AAPL, T) to view the latest news. I turn on my TV (SNE, TWX) to watch CNBC (CMCSA).  While watching CNBC (CMCSA), I scan my email accounts (GOOG, MSFT, WORK).  Once I read the news, I click through Facebook (FB), LinkedIn (MSFT), and Twitter (TWTR) to get caught up on social media.

After I finish my channel checks, I grab breakfast and eat some Honey Nut Cheerios (GIS) with a glass of Tropicana Orange Juice (PEP). While eating breakfast, I listen to ESPN Radio (DIS) on satellite radio (SIRI).

After breakfast, I go for a run (NKE, UA) to get in a little exercise. After I work out, it’s now time to get ready for work, so I take a shower, shave (PG, UL,) and get dressed (JWN, DDS). On the way to work, I stop at the gas station to fill up my truck (XOM, AXP, TM).  With a full tank of gas, I drive to Starbuck’s (SBUX, AXP) to get a cup of coffee.

After my trip to Starbuck’s (SBUX, AXP), I visit my bank (WFC) to get an extra $20.00 for the day. I take a detour to Target (TGT, AXP) to get a few office supplies.

At the office, I turn on my computer (DELL, HPQ, MSFT) to start my workday.  I use The Wall Street Journal, Barrons, Fox News, The New York Times, (NWS, FOXA, NYT), Morningstar (MORN), Value Line (VALU), and T.D. Ameritrade (AMTD) to keep abreast of the market.

At lunch, I eat at McDonald’s (MCD, AXP, SQ) to get a burger, fries, and a Coke (KO).

Back at the office, I order a new book from Amazon (AMZN, AXP, UPS) and schedule a video conference call (ZM) with a client. After the call is over, I mailed her some information (STMP).

The market had another rough day, so I went home and took my dog (PETS, CHWY) for a walk.

After my walk, my wife and I went to dinner at Eddie V’s (DRI) to get something to eat and have a glass of wine (STZ, BUD).  We used Uber (UBER).

I’m now back at home to catch up on the day (CMCSA, DIS, TWX) and check the latest social media feeds (FB, MSFT, TWTR, GOOG, MSFT).  We’re now watching movies and playing games (NFLX, DIS, MAT, HAS, ATVI).

The weekend is coming, and I’m going to work on a backyard project (HD, LOW, YETI).

Until tomorrow…

The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table. ~ Warren Buffett

March 18, 2020

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 Do Nothing?

It’s hard to do nothing. It’s hard to disconnect from a connected world. If you have children, you’ve probably heard them say: “I’m bored; there’s nothing to do!” If you want to see how hard it is to do nothing, turn off everything around you, and close your eyes for ten minutes. Welcome back. How’d you do?

The most challenging investment strategy is the buy and hold model, a strategy that relies on making a few changes to your portfolio over time. You do nothing but sit and wait for your investments to perform. It’s easy to do nothing when stocks rise as they did in 2019, but how about now? It takes courage and conviction to hold your shares during a market rout like we’re currently experiencing.

A buy and hold strategy is boring, and it’s not sexy. Tell people you own a diversified portfolio of index funds that you plan to keep forever, and they’ll roll their eyes. Warren Buffett said that people don’t like to grow rich slowly. If you read the tortoise and the hare, you know slow and steady wins the race.

Several years ago, I worked with a broker who told me he periodically bought and sold stocks to give the appearance he was monitoring his client’s accounts. His activity “strategy” benefited him more than his clients because he generated a commission with each trade.  Activity for activity’s sake is not a strategy.

Pursuing get quick rich trading schemes often end poorly. However, people are attracted to the possibility of day trading their way to riches, especially when market volatility is high like it is now. It appears easy to buy when the market falls 10% and sell when it rebounds 10%, but this is only in hindsight.

Investors get antsy when their portfolio isn’t rising. When turbulence hits, they run for the exits. During the fourth quarter of 2018, investors pulled $133 billion out of the stock market just before it started rising again.[1]

During the previous bull market (2009 to 2020), the S&P 500 rose more than 160%, including yesterday’s 12% drop. The one-month U.S. Treasury Bill considered the safest investment in the world, lost money every year since 2009 when adjusted for inflation.

Of course, there are times when you need to sell your investments or make portfolio changes. Using your funds to generate monthly income or pay off a mortgage is undoubtedly warranted. Rebalancing your account to keep your asset allocation intact is recommended.

A financial plan can help you improve your investment results and give you the necessary tools to stay invested during falling markets. It will provide you with a roadmap on how best to spend your hard-earned dollars by aligning your goals and risk tolerance to your portfolio. Your plan will be your antidote against making poor investment decisions.

Give it a try – do nothing!

The trick is, when there is nothing to do, do nothing. ~ Warren Buffett

March 17, 2020

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] https://www.yardeni.com/pub/ecoindiciwk.pdf, Dr. Edward Yardeni, May 9, 2018

Too Late to Sell?

The Dow Jones is down 18.8% for the year, so is it too late to sell? Investors have sold $34 billion in equity mutual funds and $17 billion in bond funds as they seek safety from the rout in global assets.[1] The news is ominous, and the headlines are bleak. Investors are voting with their dollars, and it’s clear they don’t want to own stocks.

In December of 2018, investors sold $133 billion in funds before stocks rose significantly in 2019. In October of 2008, investors liquidated $128 billion in mutual funds, a few months before one of the great bull markets in history.

It’s never too late to sell because stocks can always fall further. William O’Neil, the founder of Investor’s Business Daily, recommends selling your shares if they fall 7% to 8% because a small loss can turn into a big one if you don’t cut your losses. He said, “You don’t want to take a loss, so you wait, and you hope, until your loss gets so large it costs you dearly. This is by far the number one mistake most investors make.” Enron shareholders had the opportunity to sell their shares at $90, or $80, or $70, or $60, or $50, or $40, and so on before it traded to zero. I’m sure investors in Enron would have loved to sell at any price above zero, regardless of their cost basis.

An investor who sold their holdings in August of 1987, avoided the stock market crash on October 19, 1987. If you knew the Oil Embargo of 1973 was coming, you could have sold your stocks in 1972 and avoided a 41% drop in the S&P 500 from 1973 to 1974. If you sold your shares in 2007 before the Great Recession, you missed a 50% drop in the market. Of course, selling before a correction when stocks are at an all-time high is difficult, and predicting the future is impossible.

When stocks are falling, emotions transcend facts. Not many people care that stocks produce superior long-term results when their accounts have lost 20% in a few weeks.

It’s easy to look in the review mirror and say what you would have done, but what should you do today? Should you sell? Here are a few suggestions to help you decide.

  1. If your stocks are keeping you up at night, then sell your shares. If you’re losing sleep, you own too many stocks.
  2. If you need your money in one year or less, do not invest in stocks. My nieces and daughter must use their money to pay for tuition, room, board, and books, so they invested in a money market fund. I don’t need my retirement money for 10 to 15 years, so I’m 75% invested in stocks.
  3. If you’re retiring in the next two or three years, invest in U.S. Treasury Bills to cover three years’ worth of household expenses.
  4. If you don’t have a safety net, sell stocks. A recommended safety net is three to six months of expenses. If your monthly expenses are $10,000, keep $30,000 to $60,000 in cash.
  5. If you have high levels of debt, sell your stock to reduce your obligations – returns are fleeting, expenses are forever.
  6. If you need money to purchase a home, car, boat, plane, or any expensive item, sell your stocks and move the proceeds to cash.
  7. If you’re 100% allocated to stocks, reduce your equity exposure, and sell some of your holdings.
  8. If you know stocks are going to drop 20% tomorrow, sell today.

With the drop in stock prices and interest rates, bonds may be a riskier investment than stocks. The current yield on the 30-Year U.S. Treasury is 1.5%. The ten-year average Is 3.1%, and if rates rise back to the average, bonds will fall by 20%. In 1980, the 30-Year U.S Treasury yield peaked at 15.08%. If rates returned to their all-time highs, bonds would fall 75%![2] The iShares 20+ Year Treasury Bond ETF (TLT) is up 26.3% for the past year, but it fell 10.5% this week as interest rates rebounded from their remarkable lows.

Money market funds and savings accounts offer low rates. The one-month U.S. T-Bill is yielding .33%.  The current inflation rate is 2.33%, so you’re losing 2%, before taxes, to park your money in a safe account. Cash accounts and short-term bonds are not sustainable solutions for creating wealth over time.

The Dow is down 18.7% year-to-date and off 9.8% for the past year. It’s up 30.6% over the past five years, 118% for the past ten years, and 9,390% since 1930.[3] It’s impossible to know what stocks will do tomorrow, but over time they will rise.

My first full year in the investment business was in 1990, and the Dow Jones Industrial Average fell 4.25% that year; from June to December, it dropped 21%. I was devastated because every stock I bought plunged in price. However, 30 years later, the Dow is up more than 740%.

Is it too late to sell? If selling your stocks will bring you peace, then sell. However, stocks have always recovered, so make sure you’re selling for the right reasons and not from a position of fear.

Be strong, keep the faith, follow your plan, think long-term and good things will happen.

We have nothing to fear but fear itself. ~ Franklin Delano Roosevelt

March 15, 2020

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] https://ici.org/research/stats/flows/combined/combined_flows_03_11_20, Website accessed 3/14/2020.

[2] https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart

[3] YCharts

Weekly Stock Market Update – 3/14/2020

Parrott Wealth Management Weekly Stock Market Update – March 14, 2020.

It was a tough week for global assets. Oil dropped significantly as Saudi Arabia and Russia failed to come to terms with a supply deal.[1] Stocks, bonds, and gold followed suit as they reacted to the Coronavirus news.

Stocks are down more than 21% these past four weeks. The Dow Jones went from a 52-week high to a 52-week low in less than three weeks, the fastest ever.

Thursday, the Dow Jones fell 9.98%, yesterday it rose 9.36%. With wide swings, it’s tempting to try to and trade your way to riches, but I would encourage you to avoid this impulse as most day traders lose money. Historically, 94% of your returns come from your asset allocation; the remainder comes from your investment selection and market timing.

Wall Street is the only marketplace where prices fall, and people panic. If Home Depot had a 25% off sale on appliances, they’d run out of inventory due to the buying demand – not so with stocks.

Here’s how stocks, bonds, and other assets performed this past week.

  • The S&P 500 fell 9.35%
  • The NASDAQ fell 7.54%
  • International Stocks fell 14.32%
  • Emerging Markets fell 10.50%
  • Long-Term Bonds fell 7.69%
  • Gold fell 9.06%
  • Oil fell 20.33%
  • Chinese Stocks fell 6.20%

We have several investment models ranging from conservative to aggressive, and they’re updated weekly. The models are currently selling bonds to buy stocks because bonds are expensive, and stocks are cheap. We automate this process because humans are almost incapable of buying stocks when they’re low and selling them when they’re high. It’s challenging to buy any investment when it’s falling, especially when everyone is yelling to sell. One of the best ways to create long-term wealth is to buy when others are selling and sell when others are buying.

A few weeks ago, we sold our high-yielding junk bond funds in every model and replaced them with a government inflation-protected bond fund. Junk bonds are down 9.9%, and the government bond fund is down 3.6% for the past month. We’re in the process of selling our long-term bond funds and replacing them with short-term bond funds with maturities of less than one year. Over the past year, our two long-term bond funds, the Vanguard Long-Term Bond Index Fund and the iShares 20+ Treasury Bond ETF are up 20.6% and 29.2%, respectively. A 30-Year bond will fall 25% if interest rates rise 2%. A one-year bond will fall less than 2%. The risk-reward ratio for owning long-term bonds is gone. As a result of the drop in stocks and interest rates, it’s now riskier to own long-term bonds than it is to own shares of great American companies.

Charlie Munger, Warren Buffet’s partner at Berkshire Hathaway, was interviewed by the BBC in October 2009 after the Great Recession when stocks fell 53% and here’s what he said about how much he worries when stocks fall, “Zero. This is the third time that Warren and I have seen our holdings in Berkshire Hathaway go down, top tick to bottom tick, by 50%. I think it’s in the nature of long term shareholding of the normal vicissitudes, in worldly outcomes, and in markets that the long-term holder has his quoted value of his stocks go down by say 50%. In fact, you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”[2]

My first full year in the investment business was in 1990, and the Dow Jones Industrial Average fell 4.25% that year; from June to December, it dropped 21%. I was devastated because every stock I bought plunged in price. However, 30 years later, the Dow is up more than 740%. It’s a challenging time for all, but we will recover.

If you want more information, please call me at 512-813-7642.

Have a great weekend.

Sincerely,

Bill Parrott, CFP®

President and CEO

Parrott Wealth Management

www.parrottwealth.com

 

[1] https://finance.yahoo.com/news/saudi-arabia-floods-markets-25-152631512.html, by Olga Vagova, March 13, 2020

[2] http://www.psyfitec.com/2009/10/buffett-and-munger-on-bbc.html

Can You Afford a 50% Loss?

Global stock markets are selling off, oil is crashing, and the Coronavirus is spreading. Year-to-date, the Dow Jones is down about 15%, and things can get worse before they get better.

No one wants to experience a significant drop in stocks, but they do occur. Over the past fifty years, there have been three periods where stocks fell by 50% or more.[1]

Stocks fell 56% in 1973 and 1974 because of the Arab Oil Embargo.

Stocks fell 49% from 2000 to 2002 during the Tech Wreck.

Stocks fell 53% from October 2007 to March 2009 during the Great Recession.

The worst period for shareholders occurred during the Great Depression, where stocks fell 76%.

How will your life change if stocks fell by 50%? To find out, divide your assets by two and then multiply your answer by 4%. If your current assets are $1,000,000, divide by 2 to get $500,000. Multiply $500,000 by 4% to get $20,000. With assets of $1 million, you can expect an annual income of $40,000. At $500,000, the income declines to $20,000. Will the drop in assets impact your daily living or current activity? If so, consider adjusting your portfolio. But, before you make a major change, let’s look at a few investors – Ginny, Barbara, and Margaret.[2]

Ginny is 100% invested in stocks, so when stocks rise, she’ll benefit, when stocks fall, she’ll suffer. If she invested in the Dimensional Funds Global Equity Index Fund (DGEIX), she would have enjoyed an average annual return of 7.46% for the past 20 years. In 2008, her fund dropped 41.3%. Ginny invested $10,000 in this fund on January 2, 2000; it’s now worth $32,100.

Barbara is more conservative, and she allocates her investments 60% to stocks and 40% to bonds by investing in Dimensional Funds Global Allocation 60/40 Fund (DGSIX). Her fund has produced an average annual return of 6.01% for the past 20 years. Her fund lost 22.7% in 2008, considerably less than Ginny’s account. Barbara invested $10,000 in this fund on January 2, 2000; it’s now worth $25,750.

Margaret is very conservative, so she allocates 25% of her investments to stocks and 75% to bonds by investing in Dimensional Funds Global Allocation 25/75 Fund (DGTSX). Her fund generated an average annual return of 4.26% for the past twenty years. Her fund lost 7.3% in 2008. Margaret invested $10,000 in this fund on January 2, 2000; it’s now worth $19,670. Her fund didn’t lose much money during the Great Recession, but her assets are substantially less than Ginny’s.

To obtain high returns, you need to invest in risk assets, and that means enduring a few years where stocks underperform conservative assets.  If your risk level is high, allocate a significant proportion of your assets in stocks. However, if you’re not ready to lose 50% of your assets, diversify your holdings. A 40% bond allocation reduces risk by 33%, compared to an all-equity portfolio.[3]

A financial plan will help you refine your goals and determine how much money you should allocate to various asset classes. A plan will help you balance your short term needs with your long-term goals. An investor who is too conservative may run out of money when they’re older. Likewise, an investor who is too aggressive may lose their assets during a market downturn. Risk and reward will be forever linked.

Stock market corrections and downturns are normal. Since 1970, the S&P 500 has closed in negative territory ten times or 20% of the time, with an average drop of 14.9%. However, 80% of the time, stocks finished the year in positive territory. A $100,000 investment on January 2, 1970 is now worth $3,196,100.[4]

Here are some suggestions to help you through the market’s turbulence.

  • Don’t panic. Stocks rise and fall every day. If you want to sell, wait for them to rebound. On October 19, 1987, stocks fell 22.6%. In the next two days, the Dow Jones rose by 16%.
  • Diversify your assets. To reduce risk, add bonds and other asset classes to your portfolio. During the decade of the 2000s, The S&P 500 had a negative return, but if you added bonds, international investments, small company stocks, and real estate holdings, your account finished in positive territory.
  • Follow your plan. A financial plan will guide you through a market downturn. It will help you determine how much money you’ll need to fund your goals. It will also quantify your risk level.
  • Examine your risk level. How much risk is embedded in your portfolio? If you’re not sure, give us a call.
  • Look for opportunities. In a crisis, there’s always an opportunity. You’ll probably be early on the purchase, but, over time, your stocks may recover.
  • Don’t time the market. It’s tempting to hunt for bargains, but you’re not going to pick the bottom, so don’t worry about buying at the lowest tick. You’ll know in about five years if you made a wise investment decision or not.
  • Avoid margin. When stocks are falling, avoid margin. A margin balance will magnify losses.
  • Rebalance your account. An annual or quarterly rebalancing will keep your asset allocation and risk level intact.

Today is the eleventh anniversary of the stock market low of March 9, 2009. The S&P 500 closed at 676, and it currently is trading at 2,972 – a gain of 339%.[5] The phenomenal increase follows the bear market loss of 53%. It hardly makes sense to buy during the dark days of a stock market thrashing, but it’s in the depth of despair where you get the best prices. And, to quote my dad, the sun will come up tomorrow.

In the middle of difficulty lies opportunity. ~ Albert Einstein

March 9, 2020

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 Funds 2019 Matrix Book

[2] YCharts for the three portfolios – January 2, 2000 to March 9, 2009

[3] RiskAlyze

[4] YCharts

[5] Ibid

There Will be Blood!

There Will be Blood, a 2007 movie starring Daniel Day-Lewis, is based on Upton Sinclair’s book Oil!, published in 1927. Mr. Sinclair’s novel dealt with the struggle of greed and fear that many faced in the early days of the oil industry in Southern California. If Mr. Sinclair were writing his book today, 93 years later, the storyline would probably be similar.

The decline in the price of oil is one of the catalysts for the recent stock sell-off. Below is a look at some of the significant plunges in the price of oil since 1980[1].

  • April 2011, through the recent low, the price of oil is down 71%.
  • May 1980 to April 1986, the price of oil dropped 77.2%.
  • October 1990 to December 1998, the price of oil dropped 74.4%.
  • July 2008 to February 2009, the price of oil dropped 69.6%.
  • November 2000 to January 2002 the price of oil dropped 43.8%

The price of oil declined by 86% from May 1980 to December 1998, while the S&P 500 climbed 1,005%. The 18-year bull market in stocks averaged 17.6% per year. During this run, there were 2,526 up days and 2,193 down days. One of the down days was October 19, 1987, when stocks fell by 25.7%.

As markets remain volatile, stay diversified, focus on the long-term, and follow your plan. And, as a reminder, the stock market has always recovered.  It might take one week, one month, or one year, but it has always bounced back. If you need proof, please look at the following years: 1907, 1915, 1929, 1930, 1931, 1932, 1934, 1937, 1939, 1940, 1941, 1946, 1953, 1957, 1962, 1966, 1969, 1973, 1974, 1977, 1981, 1990, 2000, 2001, 2002, 2008, and 2018.

There is no free market for oil. ~ T.Boone Pickens

March 8, 2020

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 declines 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.macrotrends.net/1369/crude-oil-price-history-chart, website accessed March 8, 2020

My Friend Jackson

I received a text from a young man who wanted help with his investments. Jackson is in his early twenties, married, and a business owner. New to investing, he asked several great questions. He is excited to start generating his wealth, despite the current economic environment.

Jackson is a man of action, and he’s taking control of his financial future. He’s self-employed, hard-working and he’s not leaving anything to chance. After a few conversations, we opened a brokerage account at one of the large online investment firms. He made his initial investment, and in a few days, we’ll start a monthly investment program. In a couple of months, we’ll open a Roth IRA. Once these accounts are up and running, we will discuss creating a retirement plan for his business.

The account we setup is aggressive; more than 90% allocated to stocks. Jackson is young, so he might not need his money for 40 or 50 years! He has a long-term view, and he can care less about the Cornavirus or short-term moves in the stock market. His primary goal is to create wealth for his family. Of course, he doesn’t care about the short-term because he is so young, but neither does Warren Buffett, who is 89 years old.

I told Jackson stocks would trade up, down, and sideways for decades, so don’t get excited when they rise or depressed when they fall. In fact, he should be joyful when prices fall because he can buy great companies at lower prices.

Jackson is self-employed, and he knows it’s better to be an owner rather than a borrower. The best way to create wealth is to own things like stocks, real estate, and a business. You can’t borrow your way to wealth or invest in low yielding investments; you need to take risks and not play it safe.

Our firm does not require an asset or fee minimum, so we’ll work with anybody who wants or needs help – like Jackson. As a result, we receive inquiries from every type of investor – young, old, rich, poor, seasoned, rookies, etc. If we can’t meet their needs directly, we make sure they receive financial guidance from another source. We act like financial missionaries

To create wealth, we should all follow Jackson’s lead – think long-term, invest often, take risks, and focus on our goals.

Let no one despise you for your youth, but set the believers an example in speech, in conduct, in love, in faith, in purity. ~ 1 Timothy 4:12

March 5, 2020

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.

 

 

7 Reasons to Sell Stocks.

The Coronavirus is winning; global stock markets are losing. The Dow Jones is down 7.5% for the year, and volatility has spiked. In uncertain times, investors sell stocks to buy safe investments like U.S. Treasuries, CDs, or money market funds. Investors are seeking a port in the storm.

Does it make sense to sell stocks? Maybe. Here are seven reasons to sell.

  1. You’re 100% invested in stocks. If you’re allocated 100% to equities, sell shares to add bonds or cash to your portfolio. The bonds and cash will lower the volatility in your account.
  2. You need the money in one year or less. Stocks are unpredictable in the short term. On an annual basis, stocks finish in positive territory 73% of the time. Over twenty years, they have never lost money.[1]
  3. You need the money for a new home, to pay for college, buy a new car, or some other purpose. Invest in short-term bonds or keep your money in a money-market account. Liquidity is paramount.
  4. Your risk exposure is too high. Last year, stocks soared. If you didn’t rebalance your account, your stock exposure might be too high. For example, if your target equity exposure is 70%, and it jumped to 80% last year, sell 10% of your holdings to reduce your risk.
  5. Your goals have changed. If your financial goals changed, adjust your asset allocation to meet your current needs.
  6. You’re retiring this year. If this is your year to retire – congratulations! If so, buy bonds to cover three years of expenses, so you don’t have to worry about the stock market volatility. If your annual expenses are $100,000, purchase $300,000 in bonds.
  7. You’re donating your shares to charity. Donating stock to charity is not a sell, but a transfer. Regardless, you’re reducing your equity exposure. If you have appreciated securities or a concentrated position, consider donating your shares to your favorite charity. Your donation will lower your risk, but more importantly, you’ll help those in need. And, there’s always a need.

Selling from a position of fear has historically been a poor decision because stocks recover. When you react to volatility or a drop in prices, you’re probably selling near a bottom. If you sell your shares, when do you repurchase them? Uncertainty is a central theme for investors, and we never know what’s going to happen tomorrow. What is the price of safety? Currently, a one-year Treasury Bill is yielding .58%. The inflation rate is 2.49%, so if you invest your money in the T-Bill, you’re losing 1.91%, before taxes. Does it make sense to lose 2% per year while you wait for stocks to recover?

A financial plan will help you focus on your goals and your investment allocation. Most financial plans model for stock market drops through Monte Carlo simulations. Money Guide Pro, for example, will run a thousand scenarios to determine the soundness of your plan. It’s better to be partially right than completely wrong. The recent market swings have been wide, but, so far, it is not having any impact on our client’s financial plans.

If your time horizon is three to five years or more, use down days to buy great companies at lower prices. It’s hard to buy low and sell high, but if you dare to do so, you’ll be happy when prices rebound. Will people stop buying cell phones or hamburgers? I don’t think so, so take advantage of people’s fear to add to your stock holdings.

Stocks, like the tide, fluctuate daily, and they have been doing so for centuries. The Coronavirus will eventually pass as did SARS, Ebola, and Zika. And, unfortunately, we will have to battle another villain that will drive stock prices lower.

Create a plan, focus on your goals, think long-term, and good things will happen.

Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own. ~ Matthews 6:34

March 4, 2020

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] Morningstar Classic Year Book – 2015