Is This Time Different?

GameStop stock soared to all-time highs last week on the wings of social media traders. The Reddit traders put the short squeeze on GME and almost destroyed two high profile short-selling firms. At one point, GameStop had risen more than 1,600%! On Twitter, Reddit Investors said, “It is the common man vs. the suits.” They added, “I’ve talked to a lot of suits this weekend, and 90% of them are extremely concerned this debacle with meme stocks is going to blow up the market in the near-term.”

As the social media warriors tried to “stick it to the man,” trading on the Robinhood app exploded, and  Wall Street made even more money. Citadel is the primary trader for Robinhood and other firms, and last year they made $6.7 billion trading “free” stocks.[1] The more individuals trade, the more money Wall Street makes. One former Wall Street veteran told me: “We are in the moving business, not the storage business.” Wall Street loves activity, and it doesn’t care about your moral victories or if you want to “hold the line.” Since GME peaked last Thursday, it has dropped 80%. John Maynard Keynes said, “The market can remain irrational, longer than you can remain solvent.”

Is it true? Will a group of day trading, social media experts bring down Wall Street? Let’s review some history.

The Crash of 1929

The roaring twenties was a decade of excess, showcased by F.Scott Fitzgerald’s The Great Gatsby. The era was ripe for speculation following the Spanish Flu, and traders bid up stocks by leveraging their accounts ten to one. According to Macrotrends, the Dow Jones Industrial Average climbed 449% from 1921 to 1929.[2] Towards the end of the bull market, several high profile stocks like Anaconda Copper, GE, GM, Montgomery Ward, New York Central, RCA, Westinghouse, and Woolworth rose an average 158% from March 3, 1928, to September 3, 1929. Less than two months later, the group fell 73% as the stock market crashed on October 29, 1929.[3] After the crash, the government established the Securities and Exchange Commission to protect individual investors. The Dow Jones did not breach its pre-crash high until 1959, thirty years later!

The Nifty-Fifty

The nifty-fifty was a group of large companies that investors loved to own during the 1960s and 1970s. These momentum stocks were made popular by the legendary investor George Tsai who managed the Fidelity Capital and Manhattan Funds.[4] The nifty-fifty stocks traded to excessive valuations, and the PE ratio for these stocks climbed to more than 100. A few of the names included Coca-Cola, IBM, Polaroid, and Xerox.[5]The party ended during the market correction of 1973 and 1974 when stocks fell more than 40%. The Dow Jones declined 71% from 1965 to 1982, and It would take fourteen years for the Dow to eclipse its 1965 top.[6]

The Tech Wreck

Technology stocks soared during the mid-nineties as the internet brought elaborate trading tools to the masses. The internet turned individuals into trading machines with access to websites managed by E*Trade, Schwab, and TD Ameritrade. If you need proof of the excess, please Google E*Trade investment commercials.  From January 1995 to February 1, 1999, the Dow climbed 144%, and the NASDAQ soared 233%. Stocks like Qualcomm, Enron, Iomega, Worldcom, Global Crossing, and pets.com mesmerized day traders. A new paradigm arrived until the market corrected. The NASDAQ tumbled 70%, and the Dow Jones fell more than 32%. The tech-wreck brought the party to a halt. It took the NASDAQ more than fifteen years to recover its all-time high!

Today

Boom and bust cycles are part of investing. Pursuing quick riches through day trading is fleeting, and it only lasts a few years, at best. It took the stock market an average of nineteen years to recover the losses from the Great Depression, Nifty-Fifty correction, and Tech Wreck.

Is this time different? I doubt it. Individuals who trade without a plan to chase short-term riches will suffer when the market corrects. Long after the GameStop fiasco is over, large Wall Street firms like Goldman Sachs, Morgan Stanley, and Citadel will still be standing.

Be careful. Trade lightly.

“The four most dangerous words in investing are: ‘this time is different'” ~ Sir John Templeton

Book Recommendations

This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff

Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger

Irrational Exuberance by Robert J. Shiller

Against The Gods by Peter L. Bernstein

Barbarians at the Gate by Bryan Burrough

The Big Short by Michael Lewis

The Panic of 1907 by Robert F. Bruner

February 2, 2021

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.wsj.com/articles/gamestop-frenzy-puts-spotlight-on-trading-giant-citadel-securities-11612089000?mod=searchresults_pos4&page=1, Alexander Osipovich, January 31, 2021

[2] https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

[3] Only Yesterday by Frederick Lewis Allen

[4] https://en.wikipedia.org/wiki/Gerald_Tsai

[5] https://www.investopedia.com/ask/answers/08/nifty-fifty-50.asp ,Barclay Palmer, March 24, 2020.

[6] https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

Follow the Bouncing Ball

To make money in stocks, buy winners. To make money betting on horses, pick the fastest one. To make money betting on football, pick the best team. It’s obvious! As Will Rogers once said, “Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it. Of course, it’s impossible only to pick the winners.

In 2016, the energy sector rose 29.2%, and it was the best performing sector. If you invested in energy in 2016, you lost 2.5% in 2017, 20% in 2018, 9.3% in 2019, and 33.1% in 2020. The energy sector was the worst-performing sector for four years in a row. This year, it’s one of the best.

Utility stocks were the worst-performing sector in 2013 but the best in 2014. Financials finished 2019 as the second-best sector, and last year it was the second-worst.

Healthcare stocks underperformed energy stocks by 32% in 2016 and outperformed them by 26% a year later.

Trying to pick the best sectors or stocks can result in a feast or famine. If you’re correct, you’ll make money. If you’re wrong, you’ll lose money. Simple.

From 2011 to 2020, the S&P 500 index was never the best nor worst-performing asset class, nor did it finish any year in negative territory. It was consistent and stable relative to the individual sector components.

An S&P 500 index fund, or total market index fund, gives you exposure to every sector without trying to pick the best and avoid the worst. A broad-based index fund is an excellent choice for any portfolio.

January 14, 2021

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 Sources: YCharts

Bye, Bye and Buy Bonds?

Interest rates are trading near historical lows, but they’re rising. Since July, the yield on the 30-Year US Treasury has soared 42%. Last March, it dropped to a low of .99%. Now it’s yielding 1.88%, an increase of 90%. Rising rates from all-time lows is not a rousing endorsement to buy bonds.

Despite the low rates, bonds belong in a diversified portfolio. Bonds are safe and consistent, and they offer stability not found in other investments like stocks, gold, or Bitcoin. Also, bonds are negatively correlated to stocks, so when stocks fall, bonds rise. During the market correction last March, interest rates dropped 36% as investors purchased US government bonds. As rates fell, the iShares 20+ Treasury Bond ETF rose 15%, while the S&P 500 dropped 12%.

Bonds are a source of funds. When stocks fall, bonds rise. You can use your bonds to buy stocks – buy low and sell high.

Another reason to buy bonds is to match the maturity with your purchase. If you’re buying a new home in two years, then buy bonds with the same maturity – two years.

My career launched more than thirty years ago in Pasadena, California, as a stock-broker hired by Dean Witter. I was young, with no connections, so my primary tool for prospecting was the telephone. I cold-called morning, noon, and night looking for new clients. One of the investments I used for calling was the 30-Year US Treasury bond. At the time, they were paying more than 8%, guaranteed. My pitch was simple: “Hello, Mrs. Jones, this is Bill Parrott from Dean Witter in Pasadena. We are currently offering a guaranteed investment paying more than 8%. Would you like to hear more about it?” I couldn’t give them away because most people thought interest rates were going to rise.  Well, they were wrong, and interest rates dropped more than 87% over the next three decades. If they bought the bonds, they could have enjoyed thirty years of 8% guaranteed income, and their bond would be worth $143 today, a gain of 43%.

Since interest rates are rising, bond prices are falling. The price of a 30-year bond will fall 22.4% if interest rates rise 1%, so my recommendation is to keep your maturities short – less than five years.

Bye, bye, and buy bonds!

January 12, 2021

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 Sources: YCharts

Bamboo Shoots

I’m reading Chop Wood Carry Water by Joshua Medcalf.

In one chapter, he writes about planting and growing bamboo. After planting the bamboo seed, it must be watered every day. It’s possible to see little to no growth after three to five years. The author adds: “What you don’t see happening is what is taking place beneath the surface. Beneath the surface, a massive, dense foundation of roots is spreading out all throughout the ground to prepare for the rapid growth that the bamboo will experience. So, you keep water it and watering it, and eventually, after five years of seeing nothing at all happen above the surface, the bamboo tree shoots up to over ninety feet tall in just six weeks.”[1]

The author highlights the invisible growth and hard work it takes to be successful – to trust the process. He adds, “Most people want the ninety-foot-tall bamboo tree without the five years of process.

Investors can learn much from this passage in the book. Investors want instant gratification, with little downside. If a stock doesn’t rise quickly, it’s replaced by another in hopes it will fare better. If a portfolio is not growing fast enough, investors want to overhaul it to accelerate the growth rate.

From January 2000 through January 2011, the S&P 500 generated a negative return, eleven years without growth. If you sold the fund in 2011, you missed a 262% return on your investment.[2]

It requires patience, courage, and wisdom to create generational wealth.

January 4, 2021

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] Chop Wood Carry Water, Joshua Medcalf, page 64

[2] Vanguard 500 Index Fund, 1/1/2000 to 1/4/2021, YCharts

How to Generate Income with Options

In a low-income, zero-interest rate world incorporating an option writing strategy may give your account a boost.  Writing options on stocks you own or want to own is an excellent way to increase your income without altering your asset allocation strategy or investment plan. If you own individual stocks, this could be a strategy for you. 

There are several ways to generate income from trading options, but I will only focus on two popular strategies – covered call and put writing.

Covered Call Writing

A covered call or buy-write allows you to generate income on stocks you own if you’re willing to sell your shares at a specified price. For example, let’s say you own 1,000 shares of Apple (AAPL), currently trading for $123.25 per share, and you would like to sell them at $130. As a result, you sell the January $130 call for $2.00. Because you own 1,000 shares, you sell ten contracts (one contract = one hundred shares of stock). The $2.00 is the option premium you’ll receive, so ten contracts will generate $2,000 income (10 × 2.00 × 100) before fees. The $2,000 will credit your account on the day of your trade.

If Apple stays below $130 on the third Friday in January (expiration), you’ll keep your shares. You can then sell another call option on Apple, expiring in February, March, or April, and repeat the process. If it trades above $130 at expiration, you’re obligated to sell your shares at $130, regardless of how high it trades above the strike price. If Apple closes at $200 on expiration, you’re still obligated to sell the stock at $130 and forgo the $70 profit.

As a warning, never sell a call option without owning the underlying stock position because your risk is unlimited.

Put Writing

Put writing involves selling a put option on a stock you want to own, comparable to placing a limit order on a stock you wish to purchase at a lower price – except you get paid to wait.  For example, if you want to buy Apple at $110, currently selling for $123.25, you can enter a limit order and wait for it to trade to your price, or you can sell a put and get paid.

When you sell a put, you’re obligated to purchase the stock if it trades at or below the strike price at expiration. If you sell an Apple January $110 put, you’ll receive a credit of $1.13 per contract. If you sell ten contracts, the credit will be $1,130 (10 × $1.13 × 100), before fees. If Apple trades at or below $110 per share, you’re obligated to purchase 1,000 shares at $110 regardless of how far it trades below the strike price. If Apple stays above $110, your option will expire worthless, and you’ll profit on your trade, and then you can sell another put option expiring in February, March, or April.

A put-writing strategy is best suited for investors with a high tolerance for risk. It’s also recommended you only sell puts based on the amount of cash in your account. This strategy is known as a cash-covered put. For example, if your cash balance is $25,000, you can sell ten put contracts on a $25 stock (10 contracts = 1,000 shares; 1,000 shares x $25 = $25,000).

I trade options to generate a few extra dollars each month; it’s my side hustle. I mostly sell puts on stocks that fall sharply, which increases volatility and boosts the amount of premium I receive. When stocks fall, fear rises. An ideal trade for me is to sell a put option on a stock that is dropping 20% or more with a delta of less than 20 (If an option has a delta of 20, it means there’s a 20% chance the stock price will touch my strike price). My time frame for selling a put on a stock that’s getting crushed is three to four weeks because an option is a wasting asset, so if the stock recovers, the option will expire worthless, which is my goal.

A stock rarely drops 20% or more two or three days in a row, in my experience. If a company misses its earnings or revenue targets, investors sell the stock and drive it down to unrealistic levels. When this happens, I try to sell my put option when the market opens and fear is spiking. When investors realize the company is not going out of business, the selling will stop, and my option trade becomes profitable.

Of course, not every option trade is profitable, so I’m quick to cut my losses if I’m wrong. I want to live to see another day.

Options involve risk, but they’re an excellent way to generate a few extra nickels.

Happy Trading!

Terms[1]

Contract: One option contract = 100 shares of stock.

Expiration: The day the option contract expires.   Options expire on the third Friday of every month.  Several stocks also have options expiring weekly.

Call Option – Buyer: An option giving the buyer the right to purchase a stock at a specified price.

Put Option – Buyer: An option giving the buyer the right to sell a stock at a specified price.

Call Option – Seller: An obligation to sell stock at a specified price.

Put Option – Seller: An obligation to buy a stock at a specified price.

Premium: The amount you must pay to purchase an option or the amount you will receive when you sell an option.

Strike Price:  The exercise price where you can buy a call or sell a put.

At-the-money: The stock price is equal to the strike price of the call or the put.

Out-of-the-money: A call option where the strike price is above the stock price. A put option where the strike price is below the stock price.

In-the-money:  A call option where the strike price of the call is below the stock price. A put option where the strike price is above the stock price.

Delta: The amount by which an option premium moves divided by the dollar-for-dollar movement in the underlying asset.

Volatility:  The measure of the fluctuation in the price movement in a security over a period of time.

December 14, 2020

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] The Bible of Option Strategies – The Definitive Guide for Practical trading Strategies by Guy Cohen

Evidence

I like math. It’s pure and definite; the answers are indisputable. In junior high and high school, I had spirited conversations with my English teachers because our interpretation of events differed considerably. It was my opinion against theirs, and they frequently won because they were grading my papers. However, I always felt a little cheated because if they didn’t like my topic or handwriting, they’d knock me down a notch or two. One teacher didn’t like athletes, so she was upset when I turned in a book report on Roberto Clemente. On the other hand, my math teachers evaluated my work based on facts and time-tested formulas, which made sense.

Opinions, guesswork, and assumptions run rampant on Wall Street, especially in the absence of facts. Without facts, individuals create a story that is often wrong. Convinced the market would fall if Biden won the election, investors sold stocks. Others felt COVID would continue to drive stocks down in value. But, since election day, the Dow Jones Industrial Average is up almost 8%. Helping propel the Dow higher is news from Pfizer that they may have found a vaccine for COVID.[1] Short-term thinking is an investor’s worse enemy.

A bit of market knowledge may help you stay invested during times of turmoil and ambiguity. Here are a few facts.

  • Individuals who complete a financial plan have three times the assets of those who do little or no planning.[2]
  • Stocks outperform bonds. The 93-year average annual return for common stocks has been 10.2%, while long-term government bonds returned 5.6%. A $1 investment in large-company stocks is now worth $9,237, while $1 invested in bonds is worth $175.[3] 
  • Small-company stocks outperform large-company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.2% from 1928 to 2019. A $1 investment is now worth $90,337.  The Dimensional Large-Cap Value Index averaged 11.2%. A $1 investment in this large-cap index is now worth $17,219.[4]
  • Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% comes from market timing and investment selection.[5]
  • Passive index investing is better than active stock picking. The Standard & Poor’s passive v. active study reveals that over 15 years, 95% of active fund managers fail to outperform their benchmark, also the case for 1, 3, 5, and 10 years.[6]
  • Lower fees are imperative. Less is more. Your advisor should provide you a list of charges for their services, including the investments they offer. If your advisor is charging you more than 1% of your assets, a high hourly rate, or a monthly retainer, you may need to make a change.
  • Working with an investment advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[7] An advisor can help with financial planning, estate planning, investment planning, charitable planning, and much more. 
  • US stocks rise about 75% of the time. Since 1926, the S&P 500 has risen 69 times and fallen 25.
  • Since 1926, inflation has averaged 2.9%, and US T-Bills have returned 3.3% per year. Your net return, before taxes, has been .4%.
  • The stock market always recovers. In March, the Dow Jones was down 37%, falling to 18,591. Today it’s approaching 30,000 – a record level.

To create generational wealth, own stocks, overlook short-term moves, focus on facts, ignore conjecture, and good things will happen.

“These are the facts of the case – and they are undisputed.” ~ Kevin Bacon, A Few Good Men

November 9, 2020

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.pfizer.com/news/press-release/press-release-detail/pfizer-and-biontech-announce-vaccine-candidate-against

[2] http://www.nber.org/papers/w17078

[3] Dimensional Funds 2020 Matrix Book.

[4] Ibid.

[5] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.

[6] https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

[7] https://www.vanguard.com/pdf/ISGQVAA.pdf

A Correction Is Coming!

Warning, a stock market correction is coming. The political environment, lack of a financial stimulus package, the pandemic, corporate bankruptcies, civil unrest, and so on will be too much for the market to bear. To prove my point, let’s examine a few previous market cycles.

March 9, 2009, to October 16, 2020

The S&P 500 soared 415% from March 9, 2009, to October 16, 2020. The historic climb started after the market plunged more than 50% during the Great Recession. If you invested $100,000 at the beginning of this bull market, your account would be worth $515,000.

Despite the bull market’s stellar performance, the S&P 500 fell 34% in March 2020. It lost more than 10% nine times and dropped more than 5% on thirteen separate occasions. The average decline during this bull market was 2.71%.

January 1, 1991, to April 1, 2000

The S&P 500 climbed 353% during this bull market, including the late nineties’ melt-up in internet stocks from 1995 to 1999. This market was the first time where investors could trade online, and firms like Schwab, T.D. Ameritrade and E*Trade rose to prominence. A $100,000 investment at the beginning of this bull market grew to $453,800 on April 1, 2000.

However, the late nineties bull market experienced many significant drops, including a 20% drop in 1998 and more than a dozen declines of 5% or more. The average decline during this bull market was 1.89%.

January 1, 1982, to September 1, 1987

The S&P 500 rose 163% during the great ’80s bull market. After a dormant 1970s, the market increased significantly, fueled by declining interest rates. A $100,000 investment grew to $263,900.

Like previous bull markets, this one experienced several severe corrections. In 1982, the market fell more than 16%, and in 1984 it dropped 14%. The average decline for this five-year run was 3.97%.

October 16, 1987 – October 16, 2020

The crash of 1987 occurred 33 years ago today. If you invested $100,000 on the Friday before Black Monday, your account would be worth $1.23 million today, producing an average annual return of 7.9%. In addition to Black Monday, where the index fell 23%, your portfolio also endured the Tech Wreck of 2000, where stocks sank 43%, the Great Recession when stocks dropped 56%, and the recent pandemic where the index tumbled more than 30%.

A correction is coming, but I don’t know when. It could happen tomorrow, next week, next year, or next decade. I don’t know, nor does anyone else. And, people who claim they can predict market moves are full of rubbish.  During every bull market, there are sizeable corrections. If you liquidate your holdings during a crisis, you will miss exceptional gains when stocks recover. If you panic, you lose.

Investors can also lose money while waiting for a stock market correction. If you sold your investments in May expecting a summer pullback, you missed a 16.5% return. Since the market low on March 23, 2020, the S&P 500 is up 56%, and year-to-date it’s up 7.41%.

To be a successful investor, think long term, invest often, buy the dips, and follow your plan.

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” ~ Peter Lynch

October 19, 2020

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 = YCharts

A Mosquito In Your Tent

I love the great outdoors. Hiking, fishing, camping are the hobbies I enjoy most. My wife and I spent a few days hiking in the Rocky Mountain National Park this summer, and it was beautiful. Our best vacations tend to be outside enjoying nature. We have visited several national parks over the years, including Yellowstone, Yosemite, and Grand Teton.

Camping in the mountains, on a beach, or near a river is peaceful and serene. The views. The sounds of nature. The clean, crisp air. A robust fire. Sleeping under the stars in a tent is lovely until you hear the buzzing sound of a mosquito, a single mosquito. It’s hard to imagine how much sound a small insect can produce, but it’s enough to keep you awake and annoyed for hours. Trying to locate and kill the mosquito is even more challenging than struggling to fall asleep. Though a mosquito is tiny, it can quickly ruin the joy of spending time outside.

A mosquito is like a bad investment in a diversified portfolio; it’s hard to ignore. If an investor owns ten mutual funds – nine up, one down, they’ll focus on the loser. It’s human nature. An investment down in value can distract you from the positive returns from the rest of your holdings. Several years ago, I was reviewing my parent’s account. It was a good year for returns, and most of their stocks were up except Qualcomm.  My mom wanted to know what was wrong with it, why was it down? There was nothing structurally wrong with Qualcomm; it was just out of favor – a temporary pause in a long-term uptrend. It has since recovered.

The mosquito in the tent this year is small-cap value. Small-cap value stocks are down 11.5%, and investors are losing patience. These stocks are distorting the view of better-performing asset classes like large-cap growth stocks, up 31%.

During my quarterly reviews with clients, all eyes turn to their small-cap holdings. Why do we own these stocks again? Is there anything better? Can we sell these losers? I don’t like losses either, but there will always be an investment out of favor in a diversified portfolio. If all your assets went up or down at the same time, you’re not diversified. Over time, your investment holdings will fluctuate between leading or lagging. Sectors trade in and out of favor often.

It’s hard to imagine today, but small-cap value stocks have outperformed large-cap growth stocks for the past twenty years. A $10,000 investment in the small-cap value index is worth $58,380, whereas the same investment in the large-cap growth index grew to $39,050, a difference of $19,330.[1]

During the early 2000s, investors wanted to ditch large-cap growth stocks. From January 2000 to January 2010, they lost 24%. A $10,000 investment fell to $7,635 during the decade – a huge loser. If you sold them in 2010, you missed a 411% return for the past ten years.

It takes patience to be a successful long-term investor. Peter Lynch, the legendary investor of the Fidelity Magellan Mutual Fund, would typically own a stock for three to five years or more before it showed significant gains.

Here are a few suggestions to help you better manage your investments.

  • Buy and hold a diversified portfolio of stocks, bonds, and cash because you never know when, where, or why investments will decide to take off.
  • Invest early and often.
  • Be a net buyer of stocks. Ignore the market.
  • Rebalance your accounts annually.
  • Be patient; today’s losers can be tomorrow’s winners.
  • Think long-term to create generational wealth.
  • Develop a plan, set goals.
  • Follow your plan.

Happy Camping!

“In the stock market, the most important organ is the stomach. It’s not the brain.” ~ Peter Lynch

October 16, 2020

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

Late to the party?

It’s a bit awkward to arrive late for a party, especially if it’s very late. Walking into a room full of strangers once a party has started can be intimidating or embarrassing because it forces you to interrupt conversations or eat food picked over by the punctual guests.

I was late to a junior high roller skating party once because I wrote down the wrong starting time. When I entered the rink, my friends were already having a good time, and there were no more skates available in my size, so I rented a size 15 skate (about six sizes too big). I was uncomfortable and nervous about joining one of the cliques, and my large skates didn’t help.

If you’re late to your retirement party, have no fear because all is not lost. If you’re in your forties or fifties and have not saved any money for retirement, it may feel like you’re doomed to work forever, but that’s not the case.

The best time to start saving for retirement is in your teens or early twenties and invest thousands of dollars in high-flying stocks like Amazon or Tesla. An eighteen-year-old investing $1,000 monthly will have about $13 million at age 65. However, this is lunacy because few teenagers have the foresight, wisdom, or money to start investing (except Warren Buffett). When I was eighteen, I didn’t have a job, and I only had $60 in my savings account.  Besides winning the lottery or inheriting millions of dollars, what can you do to improve your retirement shortfall? Here are a few suggestions.

  • Inventory your assets and review your investment holdings. Locate your investment statements for your 401(k), IRA, and brokerage accounts. What do you own? What is the current value of your investments? How are your assets allocated?
  •  Calculate your liabilities. Identify your debts – home, car, credit card, student loans, etc. to figure out which ones you can refinance, reduce, or eliminate. How much money do you owe to others? What are your monthly payments? What interest rate are you paying on your debts?
  • Review your monthly expenses. Where is your money going? Establishing a budget or spending program will help you find excess dollars for savings. In a post-COVID world, you’re probably paying for things you no longer need or aren’t using, such as a gym membership. Look for items in your spending that can be reduced or eliminated.
  • Invest for growth. Stocks outperform bonds, cash, and inflation. Purchase stocks for the long haul, and they will help you make up for the lost time. The 94-year average annual return for stocks has been 10.1%.
  • Avoid speculating or gambling. It’s tempting to daytrade, buy penny stocks, or purchase options but avoid the urge. If you continually try to hit home runs, you’ll strike out often. Speculating with money you can’t afford to lose is madness.
  • Contribute the maximum amount of money to your 401(k) and IRA accounts. The government allows you to contribute $19,500 to your 401(k) plan, or $26,000 if you’re 50 or older. You can contribute $6,000 to an IRA plus an extra $1,000 if you’re 50 or older.
  • Automate your savings. Establish a monthly investment program into a few mutual funds and a savings account. Automating your savings will eliminate human error and emotions.
  • Ignore the stock market. Trying to time the stock market is impossible and a waste of time. While you’re building your retirement nest egg, be a net buyer of stocks, notably when they fall.
  • Review your progress. A quarterly review of your spending habits will allow you to adjust your plan as needed.
  • Work with a financial planner. Your planner will be your guide, accountability partner, and financial Sherpa. Working with an advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[1]   

Your retirement journey may feel insurmountable, but you can do it – particularly with a financial plan.  Saving money is akin to starting an exercise routine. It won’t be easy, but each day will get better than the next. It’s challenging to see results at first, but you will notice significant changes over time.  

Happy Retirement!

“Life is a party. Dress for it.” ~ Audrey Hepburn

October 15, 2020

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.vanguard.com/pdf/ISGQVAA.pdf

7 Things To Do Before the Election

The presidential election is less than forty days away, and investors are getting nervous.

Forty days before the 2016 election, the markets remained relatively quiet, and the S&P 500 barely budged – falling .54% from the end of September to election day. Volatility spiked fifteen days before the election, but it did not have any impact on the market.

Forty days after the 2016 election was over, the S&P 500 rose 5.54%, and volatility dropped significantly. If you remained invested through the election cycle, you probably made money. The market finished 2016 in positive territory, rising 9.54%.

Here are seven steps to take as we get closer to election day.

  1. Do nothing. Historically, elections have had little impact on the long-term direction of the market.
  2. Raise cash.  A cash reserve gives you flexibility if you want to buy stocks if they should fall.
  3. Identify stocks. Create a shopping list of five to ten companies you want to own. If they drop in price, add them to your account.
  4. Sell everything. If you’re worried about a market crash, sell your holdings and move your assets to cash. If you sell your stocks in a taxable account, you may incur a significant capital gains tax.
  5. Sell calls. Selling calls on stocks you own is an excellent strategy for generating income. It can also provide some downside protection.
  6. Buy puts. A put option provides downside protection for your portfolio. You can purchase a put option on a single stock like Apple or Tesla, or you can protect your entire portfolio. Buying put contracts is expensive, but it allows you to remain invested without selling your stocks.  
  7. Vote. Several states are open for early voting. Here is a link to a voter registration site: https://vote.gov/

Happy voting!

After forty days, Noah opened a window he had made in the ark and sent out a raven, and it kept flying back and forth until the water had dried up from the earth. ~ Genesis 6:6-7

September 28, 2020

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.